10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003

¨ Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934

Commission File No. 333-76473

EQUISTAR CHEMICALS, LP

(Exact name of Registrant as specified in its charter)

Delaware	76-0550481
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employee Identification No.)
1221 McKinney Street, Suite 700, Houston, Texas	77010
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (713) 652-7200

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

There is no established public trading market for the Registrant’s equity securities. As of June 30, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter, all of the Registrant’s equity securities were held by affiliates.

Table of Contents

	Page
PART I	1
Items 1 and 2. Business and Properties	1
Item 3. Legal Proceedings	18
Item 4. Submission of Matters to a Vote of Security Holders	19
PART II	19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6. Selected Financial Data	19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A. Disclosure of Market and Regulatory Risk	32
Item 8. Financial Statements and Supplementary Data	34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	58
Item 9A. Controls and Procedures	58
PART III	58
Item 10. Members of the Partnership Governance Committee and Executive Officers of Equistar	58
Item 11. Executive Compensation	70
Item 12. Security Ownership of Certain Beneficial Owners and Management	78
Item 13. Certain Relationships and Related Transactions	79
Item 14. Principal Accountant Fees and Services	85
PART IV	86
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K	86

PART I

Items 1 and 2. Business and Properties

Overview

Equistar Chemicals, LP (“Equistar”) is one of the world’s largest producers of basic chemicals, with total 2003 revenues of $6.5 billion, and assets of $5.0 billion as of December 31, 2003. It is North America’s second largest producer of ethylene, the world’s most widely used petrochemical. Equistar also is the third largest producer of polyethylene in North America.

Equistar’s petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Equistar’s olefins products include ethylene, propylene and butadiene. Olefins and their co-products are basic building blocks used to create a wide variety of products. Equistar’s oxygenated products include ethylene oxide (“EO”) and its derivatives, ethylene glycol (“EG”), ethanol and methyl tertiary butyl ether (“MTBE”). Oxygenated products have uses ranging from paint to cleaners to polyester fibers to gasoline additives. Equistar’s aromatics include benzene and toluene.

Equistar’s polymers segment manufactures polyolefins, including high-density polyethylene (“HDPE”), low-density polyethylene (“LDPE”), linear low-density polyethylene (“LLDPE”), polypropylene and various performance polymers. Polyethylene is used to produce packaging film, trash bags and lightweight high-strength plastic bottles for milk, juices, shampoos and detergents. Polypropylene is used in a variety of products including plastic caps and other closures, rigid packaging, automotive components, and carpet facing and backing. Equistar’s performance polymers include enhanced grades of polyethylene such as wire and cable insulating resins and polymeric powders. For additional segment information, see Note 15 of Notes to the Consolidated Financial Statements.

Equistar was formed in October 1997 as a Delaware limited partnership. Equistar began operations in December 1997 when Lyondell Chemical Company (“Lyondell”) contributed substantially all of the assets of its petrochemicals and polymers business segments to Equistar and Millennium Chemicals Inc. (“Millennium”) contributed substantially all of the assets of Millennium Petrochemicals Inc.’s ethylene, polyethylene and related products, performance polymers and ethanol businesses to Equistar. In May 1998, Lyondell, Millennium, Equistar and Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”) consummated a series of transactions to expand Equistar through the addition of Occidental’s petrochemical assets (the “Occidental Contributed Business”). From May 1998 to August 2002, Equistar’s owners were subsidiaries of Lyondell, Millennium and Occidental, with Lyondell owning a 41% interest in Equistar, and each of Millennium and Occidental owning a 29.5% interest in Equistar. On August 22, 2002, Lyondell purchased Occidental’s 29.5% interest in Equistar. As a result, Lyondell owns a 70.5% interest in Equistar, and Millennium owns the remaining 29.5% interest in Equistar.

Additional Information Available

Equistar’s principal executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas 77010 and its telephone number is (713) 652-7200. Equistar’s website address is www.equistarchem.com. Equistar’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available free of charge through Equistar’s website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). In addition, Equistar provides a copy of its Business Ethics and Conduct Policy on its website, free of charge. Information contained on Equistar’s website or any other website is not incorporated into this Annual Report and does not constitute a part of this Annual Report.

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Petrochemicals Segment

Overview

Petrochemicals are fundamental to many segments of the economy, including the production of consumer products, housing and automotive components and other durable and nondurable goods. Equistar produces a variety of petrochemicals, including olefins, oxygenated products, aromatics and specialty products, at eleven facilities located in five states. Olefins include ethylene, propylene and butadiene. Oxygenated products include EO and derivatives, EG, ethanol and MTBE. Aromatics produced include benzene and toluene. Equistar’s petrochemical products are used to manufacture polymers and intermediate chemicals, which are used in a variety of consumer and industrial products. Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for polyethylene and a large number of other chemicals, plastics and synthetics.

The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants use crude oil-based liquid raw materials, including naphtha, condensates and gas oils, to produce ethylene. The use of crude oil-based liquid raw materials results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, and specialty products, such as dicyclopentadiene (“DCPD”), isoprene, resin oil and piperylenes. Based upon independent surveys, management believes that its Channelview facility is one of the lowest cash production cost olefins facilities in the United States. Equistar’s Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and LaPorte (Deer Park), Texas plants are designed to consume primarily natural gas liquids, including ethane, propane and butane (collectively “NGLs”), to produce ethylene with some co-products such as propylene. The Corpus Christi and Channelview plants also may consume NGLs to produce ethylene, depending upon the relative economic advantage of the alternative raw materials. A comprehensive pipeline system connects the Gulf Coast plants with major olefins customers. Raw materials are sourced both internationally and domestically and are shipped via vessel and pipeline. Equistar’s Lake Charles, Louisiana facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. Olefins accounted for approximately 56% of Equistar’s total revenues in 2003, 59% in 2002 and 60% in 2001.

Equistar produces EO and its primary derivative, EG, at its Bayport facilities located in Pasadena, Texas and through a 50/50 joint venture with DuPont in Beaumont, Texas. The Bayport facility also produces other derivatives of EO, principally ethylene glycol ethers and ethanolamines. EG is used in antifreeze, polyester fibers, resins and films. EO and its derivatives are used in many consumer and industrial end uses, such as detergents and surfactants, brake fluids and polyurethane seating and bedding foams.

Equistar produces synthetic ethanol at its Tuscola, Illinois plant by a direct hydration process that combines water and ethylene. Equistar also owns and operates a facility in Newark, New Jersey for denaturing ethanol by the addition of certain chemicals. In addition, Equistar produces small volumes of diethyl ether, a by-product of its ethanol production, at its Tuscola facility. These ethanol products are ingredients in various consumer and industrial products, as described more fully in the table below.

The following table outlines Equistar’s primary petrochemical products, annual processing capacity as of January 1, 2004, and the primary uses for such products. Unless otherwise specified, annual processing capacity was calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below.

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Product	Annual Capacity	Primary Uses
OLEFINS:
Ethylene	11.6 billion pounds (a)	Ethylene is used as a raw material to manufacture polyethylene, EO, ethanol, ethylene dichloride and ethylbenzene.
Propylene	5 billion pounds (a)(b)	Propylene is used to produce polypropylene, acrylonitrile and propylene oxide.
Butadiene	1.2 billion pounds	Butadiene is used to manufacture styrene-butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets, paper coatings and engineered plastics.
OXYGENATED PRODUCTS:
Ethylene Oxide (EO)	1.1 billion pounds EO equivalents; 400 million pounds as pure EO (c)	EO is used to produce surfactants, industrial cleaners, cosmetics, emulsifiers, paint, heat transfer fluids and ethylene glycol.
Ethylene Glycol (EG)	1 billion pounds (c)	EG is used to produce polyester fibers and film, polyethylene terephthalate (“PET”) resin, heat transfer fluids and automobile antifreeze.
Ethylene Oxide Derivatives	225 million pounds	EO derivatives include ethylene glycol ethers and ethanolamines, and are used to produce paint and coatings, polishes, solvents and chemical intermediates.
Ethanol	50 million gallons	Ethanol is used in the production of solvents as well as household, medicinal and personal care products.
MTBE	284 million gallons (18,500 barrels/day) (d)	MTBE is a gasoline component for reducing emissions in reformulated gasolines and enhancing octane value.
AROMATICS:
Benzene	310 million gallons	Benzene is used to produce styrene, phenol and cyclohexane. These products are used in the production of nylon, plastics, synthetic rubber and polystyrene. Polystyrene is used in insulation, packaging and drink cups.
Toluene	66 million gallons	Toluene is used as an octane enhancer in gasoline, as a chemical raw material for benzene and/or paraxylene production, and a core ingredient in toluene diisocyanate, a compound used in urethane production.
SPECIALTY PRODUCTS:
Dicyclopentadiene (DCPD)	130 million pounds	DCPD is a component of inks, adhesives and polyester resins for molded parts such as tub and shower stalls and boat hulls.
Isoprene	145 million pounds	Isoprene is a component of premium tires, adhesive sealants and other rubber products.
Resin Oil	150 million pounds	Resin oil is used in the production of hot-melt adhesives, inks, sealants, paints and varnishes.
Piperylenes	100 million pounds	Piperylenes are used in the production of adhesives, inks and sealants.
Alkylate	337 million gallons (e)	Alkylate is a premium gasoline blending component used by refiners to meet Clean Air Act standards for reformulated gasoline.

(a) Includes 850 million pounds/year of ethylene capacity and 200 million pounds/year of propylene capacity at Equistar’s Lake Charles, Louisiana facility. Equistar’s Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions.

(b) Does not include refinery-grade material or production from the product flexibility unit at Equistar’s Channelview facility, which can convert ethylene and other light petrochemicals into propylene. This facility has an annual processing capacity of one billion pounds per year of propylene.

(c) Includes 350 million pounds/year of EO equivalents capacity and 400 million pounds/year of EG capacity at the Beaumont, Texas facility, which represents Equistar’s 50% of the total EO equivalents capacity and EG capacity, respectively, at the facility. The Beaumont, Texas facility is owned by PD Glycol, a partnership owned 50% by Equistar and 50% by DuPont.

(d) Includes up to 44 million gallons/year of capacity processed by Equistar for LYONDELL-CITGO Refining LP (“LCR”) and returned to LCR.

(e) Includes up to 172 million gallons/year of capacity processed by Equistar for LCR and returned to LCR.

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Raw Materials

The raw materials cost for olefins production is the largest component of total cost for the petrochemicals business. The primary raw materials used in the production of olefins are crude oil-based liquids (also referred to as “heavy raw materials”) and NGLs (also referred to as “light raw materials”). Crude oil-based liquids generally are delivered by ship or barge. NGLs are delivered to Equistar’s facilities primarily via pipeline.

Olefins plants with the flexibility to consume a wide range of raw materials historically have had lower variable costs than olefins plants that are restricted in their raw material processing capability to NGLs. Crude oil-based liquids have had an historical cost advantage over NGLs such as ethane and propane, assuming the co-products were recovered and sold. Facilities using crude oil-based liquids historically have generated, on average, approximately four cents of additional variable margin per pound of ethylene produced compared to facilities restricted to using ethane. This margin advantage is based on an average of historical data over a period of years and is subject to short-term fluctuations, which can be significant. For example, during the first quarter of 2003, when crude oil prices rose sharply in anticipation of the war in Iraq, the advantage was significantly reduced. However, the advantage rebounded strongly in the second quarter of 2003, bringing the 2003 yearly average back to historical levels. Equistar has the capability to realize this margin advantage due to its ability to process crude oil-based liquids at the Channelview, Corpus Christi and Chocolate Bayou facilities. Equistar temporarily idled its LaPorte ethylene facility from June 2003 to August 2003 to lower its average cost of U.S. ethylene production by taking advantage of unused production capacity at its Channelview, Corpus Christi and Chocolate Bayou facilities, which can process crude oil-based liquids.

The Channelview facility is particularly flexible because it can range from processing all crude oil-based liquids to processing a majority of NGLs. The Corpus Christi plant can range from processing predominantly crude oil-based liquids to processing predominantly NGLs. The Chocolate Bayou facility processes 100% crude oil-based liquids. Equistar’s LaPorte facility can process natural gasoline and NGLs, including heavier NGLs such as butane. Equistar’s three other olefins facilities process only NGLs.

As described above, Equistar believes that its raw material flexibility is a key advantage in the production of olefins. As a result, although the majority of Equistar’s crude oil-based liquids requirements are purchased via contractual arrangements from a variety of domestic and international sources, Equistar also purchases crude oil-based liquids on the spot market from domestic and international sources in order to maintain its raw material flexibility and to take advantage of raw material pricing opportunities. Similarly, Equistar purchases a majority of its NGLs requirements via contractual arrangements from a variety of sources, but also purchases NGLs on the spot market. Equistar also obtains a portion of its crude oil-based liquids requirements from LCR at market-related prices. Equistar purchases all of its methanol requirements from Lyondell at cost-based prices. Also, Equistar purchases large amounts of natural gas to be used as energy for consumption in its business via market-based contractual arrangements with a variety of sources.

The raw materials for Equistar’s petrochemicals segment are, in general, commodity crude oil-based liquids and NGLs with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for Equistar’s petrochemicals business segment. For additional discussion regarding the effects of raw material pricing on recent operating performance, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

Ethylene produced by the Clinton and Morris facilities generally is consumed as a raw material by the polymers operations at those sites, or is transferred to Tuscola from Morris by pipeline for the production of ethanol. Ethylene produced by Equistar’s LaPorte facility is consumed as a raw material by Equistar’s polymers operations and Millennium’s vinyl acetate operations in LaPorte and also is distributed by pipeline for other internal uses and to third parties. Ethylene and propylene produced at the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles olefins plants generally are distributed by pipeline or via exchange agreements to Equistar’s Gulf Coast polymer and EO/EG facilities as well as to Equistar’s affiliates and unrelated parties. Equistar’s Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. For the year ended December 31, 2003, approximately 70% of Equistar’s ethylene, based on sales dollars, was sold to

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Equistar’s polymers or oxygenated products businesses or sold to Equistar’s owners and their affiliates at market-related prices. In addition, Equistar also had significant ethylene sales to Occidental Chemical Corporation (a subsidiary of Occidental, which is the beneficial owner of approximately 25% of Lyondell) during 2003 pursuant to a long-term ethylene supply agreement.

Equistar sells a majority of its olefins products to customers with whom it has had long-standing relationships. These sales generally are made under written agreements that typically provide for monthly negotiation of price; customer purchases of a specified minimum quantity; and three- to six-year terms with automatic one- or two-year term extension provisions. Some contracts may be terminated early if deliveries have been suspended for several months. No single petrochemicals customer accounted for 10% or more of Equistar’s total revenues in 2003.

EO and EG typically are sold under three- to five-year contracts, with monthly pricing based on market conditions. Lyondell provides sales services for Equistar outside of North America for EO derivatives. Glycol ethers are sold primarily into the solvent and distributor markets at market prices, as are ethanolamines and brake fluids. Ethanol and ethers primarily are sold under one-year contracts at market prices.

Equistar licenses MTBE technology under a license from a subsidiary of Lyondell and sells a significant portion of MTBE produced at one of its two Channelview units to Lyondell at market-related prices. The production from the second unit is processed by Equistar and returned to LCR for gasoline blending. MTBE produced at Chocolate Bayou is sold at market-related prices to Lyondell for resale.

Equistar sells most of its aromatics production under contracts that have initial terms ranging from one to three years and that typically contain automatic one-year term extension provisions. These contracts provide for monthly price adjustments based upon market prices. Benzene produced by LCR is sold directly to Equistar at market-related prices. Equistar serves as LCR’s sole agent to market toluene produced by LCR and receives a marketing fee for such services.

Equistar at times purchases ethylene, propylene, benzene and butadiene for resale, when necessary, to satisfy customer demand for these products above production levels. Volumes of ethylene, propylene, benzene and butadiene purchased for resale can vary significantly from period to period. However, purchased volumes do not have a significant impact on profitability.

Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi, La Porte and Lake Charles facilities is shipped via a 1,430-mile pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. This pipeline system, some of which is owned and some of which is leased by Equistar, extends from Corpus Christi to Mont Belvieu to Port Arthur, Texas as well as around the Lake Charles, Louisiana area. In addition, exchange agreements with other olefins producers allow access to customers who are not directly connected to Equistar’s pipeline system. Some ethylene is shipped by railcar from Clinton, Iowa to Morris, Illinois. A pipeline owned and operated by an unrelated party is used to transport ethylene from Morris, Illinois to Tuscola, Illinois. Some propylene is shipped by ocean-going vessel. Ethylene oxide is shipped by railcar, and its derivatives are shipped by railcar, truck, isotank or ocean-going vessel. Butadiene, aromatics and other petrochemicals are distributed by pipeline, railcar, truck, barge or ocean-going vessel.

In 2003, Equistar entered into a long-term propylene supply arrangement with a subsidiary of Sunoco, Inc. Beginning in April 2003, Equistar supplies 700 million pounds of propylene annually to Sunoco, with a majority of the propylene to be supplied under a cost-based formula and the balance to be supplied on a market-related basis. This 15-year supply arrangement replaces a previous contract under which Equistar supplied 400 million pounds of propylene annually to Sunoco at market-related prices. For additional discussion regarding the transactions with Sunoco, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Competition and Industry Conditions

The bases for competition in Equistar’s petrochemicals products are price, product quality, product deliverability, reliability of supply and customer service. Equistar competes with other large domestic producers of petrochemicals, including BP p.l.c. (“BP”), Chevron Phillips Chemical Company LP (“ChevronPhillips”), The Dow Chemical Company (“Dow”), Enterprise Products Partners L.P., Exxon Mobil Corporation (“ExxonMobil”),

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Huntsman Chemical Company (“Huntsman”) and Shell Chemical Company. Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide and the formation of ChevronPhillips, has brought North American production capacity under the control of fewer, although larger and stronger, competitors.

Equistar’s combined rated ethylene capacity at January 1, 2004 was approximately 11.6 billion pounds per year, or approximately 15% of total North American production capacity. Based on published rated production capacities, Equistar believes it is the second largest producer of ethylene in North America. North American ethylene rated capacity at January 1, 2004 was approximately 78 billion pounds per year. Approximately 77% of the total ethylene production capacity in North America is located along the Gulf Coast.

Petrochemicals profitability is affected by raw materials costs and the level of demand for petrochemicals and their derivatives, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. Ethylene markets continue to be affected by excess capacity as a result of previous capacity additions, which have not yet been fully absorbed due to weak demand growth over the last three years. However, with the shut down of two of Dow’s Gulf Coast olefins plants in 2003 and improving demand as worldwide economic growth recovers, operating rates have begun to improve. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions and other factors that will affect petrochemical industry profitability in the future. The petrochemicals industry historically has experienced significant volatility in profitability due to fluctuations in capacity utilization. Equistar’s other major commodity chemical products also experience cyclical market conditions similar to, although not necessarily coincident with, those of olefins.

Polymers Segment

Overview

Through facilities located at nine plant sites in four states, Equistar’s polymers segment manufactures a wide variety of polyolefins, including polyethylene, polypropylene and various performance polymers. Polyolefins are used in a variety of consumer and industrial products, including packaging film, trash bags, automotive parts, plastic bottles and caps and compounds for wire and cable insulation.

Equistar manufactures polyethylene using a variety of technologies at five facilities in Texas and at its Morris, Illinois and Clinton, Iowa facilities. The Morris and Clinton facilities enjoy a freight cost advantage over Gulf Coast producers in delivering products to customers in the U.S. Midwest and on the East Coast of the United States. Polyethylene accounted for approximately 28% of Equistar’s total revenues in 2003, 27% in 2002 and 27% in 2001. Equistar produces performance polymer products, which include enhanced grades of polyethylene and polypropylene, at several of its polymers facilities. Equistar believes that, over a business cycle, average selling prices and profit margins for performance polymers tend to be higher than average selling prices and profit margins for higher-volume commodity polyethylenes. Equistar also produces wire and cable insulating resins and compounds at its LaPorte, Texas facility, and wire and cable insulating compounds at its Fairport Harbor, Ohio facility. Wire and cable insulating resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Equistar intends to temporarily consolidate its automotive compound production at the Fairport Harbor, Ohio facility and temporarily idle the automotive compound production unit at the LaPorte, Texas facility at the end of the first quarter of 2004. Equistar’s Morris, Illinois facility manufactures polypropylene using propylene produced as a co-product of Equistar’s ethylene production as well as propylene purchased from unrelated parties. Polypropylene is sold for various applications in the automotive, housewares and appliance industries. On March 31, 2003, Equistar sold its Bayport polypropylene manufacturing unit in Pasadena, Texas to a subsidiary of Sunoco. For additional discussion regarding the transactions with Sunoco, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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The following table outlines Equistar’s polymers and performance polymers products, annual processing capacity at January 1, 2004, and the primary uses for such products. Unless otherwise specified, annual processing capacity was calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below.

Product	Annual Capacity	Primary Uses
POLYETHYLENE:
High density polyethylene (HDPE)	3.2 billion pounds	HDPE is used to manufacture grocery, merchandise and trash bags; food containers for items from frozen desserts to margarine; plastic caps and closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays; pails for items from paint to fresh fruits and vegetables; safety equipment such as hard hats; house wrap for insulation; bottles for household and industrial chemicals and motor oil; milk, water, and juice bottles; and large (rotomolded) tanks for storing liquids such as agricultural and lawn care chemicals.
Low density polyethylene (LDPE)	1.4 billion pounds	LDPE is used to manufacture food packaging films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags for mulch and potting soil; boil-in-bag bags; coatings on flexible packaging products; and coatings on paper board such as milk cartons. Ethylene vinyl acetate is a specialized form of LDPE used in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors and flexible binders.
Linear low density polyethylene (LLDPE)	1.1 billion pounds	LLDPE is used to manufacture garbage and lawn-leaf bags; industrial can liners; housewares; lids for coffee cans and margarine tubs, dishpans, home plastic storage containers, kitchen trash containers; large (rotomolded) toys like outdoor gym sets; drip irrigation tubing; protective coating for telephone wires, and film; shrink wrap for multi-packaging canned food, bag-in-box bags, produce bags, and pallet stretch wrap.
POLYPROPYLENE:
Polypropylene	280 million pounds	Polypropylene is used to manufacture fibers for carpets, rugs and upholstery; housewares; automotive battery cases; automotive fascia, running boards and bumpers; grid-type flooring for sports facilities; fishing tackle boxes; and bottle caps and closures.
PERFORMANCE POLYMERS:
Wire and Cable Insulating Resins and Compounds	(a)	Wire and cable insulating resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications.
Polymeric Powders	(a)	Polymeric powders are component products in structural and bulk molding compounds, parting agents and filters for appliance, automotive and plastics processing industries.
Polymers for Adhesives, Sealants and Coatings	(a)	Polymers are components in hot-melt-adhesive formulations for case, carton and beverage package sealing, glue sticks, automotive sealants, carpet backing and adhesive labels.
Reactive Polyolefins	(a)	Reactive polyolefins are functionalized polymers used to bond non-polar and polar substrates in barrier food packaging, wire and cable insulation and jacketing, automotive gas tanks and metal coating applications.

(a) These are enhanced grades of polyethylene and are included in the capacity figures for HDPE, LDPE and LLDPE above, as appropriate.

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Raw Materials

The primary raw material for Equistar’s polymers segment is ethylene. With the exception of the Chocolate Bayou polyethylene plant, Equistar’s polyethylene production facilities can receive their ethylene directly from Equistar’s petrochemical facilities via Equistar’s olefins pipeline system, by third-party pipelines or from on-site production. All of the ethylene used in Equistar’s polyethylene production is produced internally by Equistar’s petrochemicals segment. However, the polyethylene plants at Chocolate Bayou, LaPorte and Bayport, Texas are connected by pipeline to unrelated parties and could receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois receives propylene from Equistar’s petrochemicals segment and from unrelated parties.

The raw materials for Equistar’s polymers segment are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for Equistar’s polymers business segment. For additional discussion regarding the effects of raw material pricing on recent operating results, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

Equistar’s polymers products primarily are sold to an extensive base of established customers. Approximately 65% of Equistar’s polymers products volumes are sold to customers under term contracts, typically having a duration of one to three years. The remainder generally is sold without contractual term commitments. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement between Equistar and the customer. No single polymers customer accounted for 10% or more of Equistar’s total revenues in 2003.

Polymers are primarily distributed via railcar. Equistar owns or leases, pursuant to long-term lease arrangements, approximately 7,850 railcars for use in its polymers business. Equistar sells the vast majority of its polymers products in North America, and such sales primarily are through its own sales organization. It generally engages sales agents to market its polymers in the rest of the world.

Competition and Industry Conditions

The bases for competition in Equistar’s polymers products are price, product performance, product quality, product deliverability, reliability of supply and customer service. Equistar competes with other large producers of polymers, including Atofina, BP Solvay Polyethylene, ChevronPhillips, Dow, Eastman Chemical Company, ExxonMobil, Formosa Plastics, Huntsman, NOVA Chemicals Corporation and Westlake Polymers. Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide, the formation of ChevronPhillips, and the polymers business combinations between BP and Solvay, has brought North American production capacity under the control of fewer, although larger and stronger, competitors.

Based on published rated industry capacities, Equistar is the third largest producer of polyethylene in North America. The combined rated capacity of Equistar’s polyethylene units as of January 1, 2004 was approximately 5.7 billion pounds per year, or approximately 15% of total industry capacity in North America. There are 19 other North American producers of polyethylene, the most significant of which are ChevronPhillips, Dow and ExxonMobil.

Polymers profitability is affected by raw material costs and the worldwide level of demand for polymers, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions and other factors, which will affect polymers industry profitability in the future.

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Properties Owned or Leased by Equistar

Equistar’s principal manufacturing facilities and principal products as of January 1, 2004 are set forth below. All of these facilities are wholly owned by Equistar unless otherwise noted.

Location	Principal Products
Beaumont, Texas (a)*	EG
Channelview, Texas (b)*	Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil, Piperylenes, Alkylate and MTBE
Corpus Christi, Texas*	Ethylene, Propylene, Butadiene and Benzene
Chocolate Bayou, Texas (c)	HDPE
Chocolate Bayou, Texas (c)(d)*	Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil and MTBE
LaPorte (Deer Park), Texas (e)*	Ethylene, Propylene, LDPE, LLDPE, Wire and Cable Insulating Resins and Polymers for Adhesives, Sealants and Coatings
Matagorda, Texas*	HDPE
Bayport (Pasadena), Texas*	EO, EG and Other EO Derivatives
Bayport (Pasadena), Texas (f)*	LDPE
Victoria, Texas (d)*	HDPE
Lake Charles, Louisiana (g)*	Ethylene and Propylene
Morris, Illinois*	Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois*	Ethanol and Polymeric Powders
Clinton, Iowa*	Ethylene, Propylene, LDPE, HDPE and Reactive Polyolefins
Fairport Harbor, Ohio (h)	Wire and Cable Insulating Compounds
Newark, New Jersey	Denatured Alcohol

 * As of January 1, 2004, facilities which received the OSHA Star Certification, which is the highest safety designation issued by the U. S. Department of Labor.

(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by Equistar and 50% by DuPont.

(b) The Channelview facility has two ethylene processing units. Lyondell owns a methanol plant located within the Channelview facility on property Lyondell leases from Equistar. This methanol plant is being operated for Lyondell by Equistar on behalf of an unrelated party. Another unrelated party owns and operates a facility on land leased from Equistar that is used to purify hydrogen from Lyondell’s methanol plant. Equistar also operates a styrene maleic anhydride unit and a polybutadiene unit, which are owned by a third party and are located on property leased from Equistar within the Channelview facility.

(c) Millennium and Occidental each contributed a facility located in Chocolate Bayou. These facilities are not on contiguous property.

(d) The land is leased.

(e) Equistar intends to temporarily consolidate its automotive compound production at the Fairport Harbor, Ohio facility and temporarily idle the automotive compound production unit at the LaPorte, Texas facility at the end of the first quarter of 2004.

(f) The facility is located on land leased from Sunoco. The facility is operated by Sunoco for Equistar.

(g) The Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. The facilities and land are leased from Occidental Chemical Corporation, a subsidiary of Occidental, under a lease that expires in May 2004 and has renewal provisions for two additional one-year periods at either party’s option.

(h) The building and land are leased.

Storage capacity for up to approximately 13 million barrels of NGLs, ethylene, propylene and other hydrocarbons is provided in caverns within the salt dome at the Mont Belvieu facility. There are an additional 3 million barrels of ethylene and propylene storage and four brine ponds operated by Equistar on leased property in Markham, Texas.

Equistar uses an extensive olefins pipeline system, some of which it owns and some of which it leases, extending from Corpus Christi to Mont Belvieu to Port Arthur and around the Lake Charles area. Equistar owns other pipelines in connection with its Chocolate Bayou, Corpus Christi, LaPorte, Matagorda and Victoria facilities. Equistar uses a pipeline owned and operated by an unaffiliated party to transport ethylene from its Morris facility to

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its Tuscola facility. Equistar owns and leases several pipelines connecting the Channelview facility, the LCR refinery and the Mont Belvieu storage facility, which are used to transport raw materials, butylenes, hydrogen, butane, MTBE and unfinished gasolines. Equistar also owns a barge docking facility near the Channelview facility capable of berthing eight barges and related terminal equipment for loading and unloading raw materials and products. Equistar owns or leases pursuant to long-term lease arrangements approximately 9,400 railcars for use in its petrochemicals and polymers businesses.

Lyondell provides office space to Equistar for its executive offices and headquarters in downtown Houston, Texas as part of a shared services arrangement. See “Item 13. Certain Relationships and Related Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.” In addition, Equistar owns facilities that house the Chocolate Bayou, Cincinnati and Morris research operations. Equistar also leases sales facilities and leases storage facilities, primarily in the Gulf Coast area, from various parties for the handling of products.

Employee Relations

As of December 31, 2003, Equistar employed approximately 3,165 full-time employees. In addition to its own employees, Equistar uses the services of Lyondell employees pursuant to a shared services arrangement and also uses the services of independent contractors in the routine conduct of its business. Approximately 5% of Equistar’s employees are covered by collective bargaining agreements. Equistar believes that its relations with its employees are good. See “Item 13. Certain Relationships and Related Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.”

Research and Technology; Patents and Trademarks

Equistar conducts research and development principally at its Cincinnati, Ohio technical center, with an additional technical center located at the Chocolate Bayou, Texas facility. Equistar’s research and development expenditures were $38 million in 2003, $38 million in 2002 and $39 million in 2001, all of which were expensed as incurred.

Equistar maintains a patent portfolio that is continuously supplemented by new patent applications related to its petrochemicals and polymers businesses. As of December 31, 2003, Equistar owned approximately 215 United States patents and approximately 335 worldwide patents. Equistar has numerous trademarks and trademark registrations in the United States and other countries, including the Equistar logo. Equistar does not regard its business as being materially dependent upon any single patent or trademark.

RISK FACTORS THAT MAY AFFECT EQUISTAR

There are many factors that may affect the businesses and results of operations of Equistar. Some of these factors are discussed below. For additional discussion regarding factors that may affect the businesses and operating results of Equistar, see “Items 1 and 2. Business and Properties,” “Forward-Looking Statements,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market and Regulatory Risk.”

Cyclicality and Overcapacity in the Petrochemical and Polymer Industries

Equistar’s historical operating results reflect the cyclical and volatile nature of the supply-demand balance in the petrochemical and polymer industries. These industries historically have experienced alternating periods of capacity shortages leading to tight supply, causing prices and profit margins to increase, followed by periods when substantial capacity is added, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins. This cyclical pattern is most visible in the markets for ethylene and polyethylene, resulting in volatile profits and cash flow over the business cycle.

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There is ongoing overcapacity in the petrochemical and polymer industries, as a number of Equistar’s competitors in various segments of the petrochemical and polymer industries have added capacity and demand growth has lagged behind rates experienced historically. There can be no assurance that future growth in product demand will be sufficient to utilize current or additional capacity. Excess industry capacity has depressed and may continue to depress Equistar’s volumes and margins. The global economic and political environment continues to be uncertain. This environment and uncertainty contributed to low industry operating rates, added to the volatility of raw material and energy costs, and forestalled the industry’s recovery from trough conditions, which has and may continue to place pressure on Equistar’s results of operations. As a result of excess industry capacity and weak demand for products, as well as rising energy costs and raw material prices, Equistar’s operating income has declined and may remain volatile.

Raw Materials and Energy Costs

Equistar purchases large amounts of raw materials and energy for its businesses. The cost of these raw materials and energy, in the aggregate, represent a substantial portion of Equistar’s operating expenses. The prices of raw materials and energy generally follow price trends of, and vary with the market conditions for, crude oil and natural gas, which may be highly volatile and cyclical. Results of operations for Equistar have been and could be in the future significantly affected by increases and volatility in these costs. Price increases increase Equistar’s working capital needs, and can therefore also adversely affect Equistar’s liquidity and cash flow.

In addition, higher North American natural gas prices relative to natural gas cost-advantaged regions, such as the Middle East, have adversely affected the ability of many domestic chemical producers to compete internationally since natural gas prices affect a significant portion of the industry’s raw materials and energy sources. This environment has had a negative impact on Equistar’s exports, and has reduced the competitiveness of U.S. producers. It also has increased the competition for sales of chemicals in North America, as U.S. production that would otherwise have been sold overseas was instead offered for sale domestically, resulting in excess supply and lower margins in North America.

General Economic Conditions and Other External Factors

External factors beyond Equistar’s control, such as general economic conditions, international events and circumstances, competitor actions, and governmental regulation in the United States and abroad, can cause volatility in the price of raw materials and other operating costs, as well as significant fluctuations in demand for Equistar’s products, and can magnify the impact of economic cycles on Equistar’s businesses. Equistar believes that events in the Middle East had a particular influence in 2003 and may continue to do so. In addition, a number of Equistar’s products are highly dependent on durable goods markets, such as the housing and automotive markets, that are themselves particularly cyclical. If the global economy does not improve, demand for Equistar’s products and its income and cash flow would continue to be adversely affected. In addition, these risks have and may continue to increase volatility in prices for crude oil and natural gas and could result in increased raw material costs. Further, these risks could cause increased instability in the financial markets and adversely affect Equistar’s ability to access capital.

Equistar may reduce production at or idle a facility for an extended period of time or exit a business because of high raw material prices, an oversupply of a particular product and/or a lack of demand for that particular product, which makes production uneconomical. Any decision to permanently close facilities or exit a business would result in writing off the remaining book value of the assets involved. Temporary outages sometimes last for several quarters or, in certain cases, longer and cause Equistar to incur costs, including the expenses of maintaining and restarting these facilities. It is possible that factors like increases in raw material costs or lower demand in the future will cause Equistar to further reduce operating rates, idle facilities or exit uncompetitive businesses.

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Commodity Products

Equistar sells its products in highly competitive markets. Due to the commodity nature of most of Equistar’s products, competition in these markets is based primarily on price and to a lesser extent on product performance, product quality, product deliverability, reliability of supply and customer service. As a result, Equistar generally is not able to protect its market position for these products by product differentiation and may not be able to pass on cost increases to its customers. Accordingly, increases in raw material and other costs may not necessarily correlate with changes in prices for these products, either in the direction of the price change or in magnitude. In addition, Equistar’s ability to increase product sales prices, and the timing of those increases, are affected by the supply-demand balances for Equistar’s products, as well as the capacity utilization rates for those products. Timing differences in pricing between raw material costs, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, have had and may continue to have a negative effect on profitability.

Environmental and Other Regulatory Matters

Equistar cannot predict with certainty the extent of its future liabilities and costs under environmental, health and safety laws and regulations and Equistar cannot guarantee that they will not be material. In addition, Equistar may face liability for alleged personal injury or property damage due to exposure to chemicals and other hazardous substances at its facilities or chemicals that it otherwise manufactures, handles or owns. Although these types of claims have not historically had a material impact on Equistar’s operations, a significant increase in the success of these types of claims could materially adversely affect Equistar’s business, financial condition, operating results or cash flow.

Equistar’s policy is to be in compliance with all applicable environmental laws. Equistar also is committed to the principles of Responsible Care^®, an international chemical industry initiative to enhance the industry’s responsible management of chemicals. Equistar (together with the industries in which it operates) is subject to extensive national, state and local environmental laws and regulations concerning, and is required to have permits and licenses regulating, emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, some of these laws and regulations require Equistar to meet specific financial responsibility requirements. Equistar cannot accurately predict future developments, such as increasingly strict environmental laws, and inspection and enforcement policies, as well as higher compliance costs, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Some risk of environmental costs and liabilities is inherent in particular operations and products of Equistar, as it is with other companies engaged in similar businesses, and there is no assurance that material costs and liabilities will not be incurred. In general, however, with respect to the costs and risks described above, Equistar does not expect that it will be affected differently than the rest of the chemical industry where its facilities are located.

Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities, the costs of transportation and storage of raw materials and finished products and the costs of the storage and disposal of wastewater. Also, U.S. “Superfund” statutes may impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such responsible parties (or any one of them, including Equistar) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposal site. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.”

Equistar has on-site solid waste management units at several of its facilities, which were used in the past to dispose of waste generated at the facilities. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to these facilities. Equistar’s policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors

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as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. Equistar has accrued amounts (without regard to potential insurance recoveries or third party reimbursements) believed to be sufficient to cover current estimates of the cost for remedial measures based upon its interpretation of current environmental standards. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. Based on the establishment of such accruals, Equistar does not anticipate any material adverse effect upon its financial statements or competitive position as a result of compliance with the laws and regulations described in this or the preceding paragraphs. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.” Lyondell, Millennium Petrochemicals and Occidental have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions. Lyondell, Millennium, Occidental and Equistar each remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar. See “Item 13. Certain Relationships and Related Transactions – Asset Contributions by Lyondell and Affiliates of Millennium and Occidental” for more information regarding these indemnification obligations.

In some cases, compliance with environmental, health and safety laws and regulations can only be achieved by capital expenditures. In the years ended December 31, 2003, 2002 and 2001, Equistar spent approximately $38 million, $14 million and $16 million, respectively, for environmentally related capital expenditures at existing facilities. The increased 2003 capital expenditures resulted from new emission reduction rules, as discussed below. Equistar currently estimates that environmentally related capital expenditures at its existing facilities will be approximately $87 million and $82 million for 2004 and 2005, respectively, including preliminary estimated expenditures for engineering studies related to emission control standards for highly reactive, volatile organic compounds (“HRVOCs”), as discussed below.

The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002 changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” for a summary of the estimated capital expenditures required for Equistar to comply with the 80% NOx emission reduction requirements. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar is still assessing the impact of the new HRVOC control requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Equistar’s MTBE sales represented approximately 3% of its total revenues in 2003. At this time, Equistar cannot predict the impact that these initiatives will have on MTBE margins or volumes longer term, but any effect on Equistar’s financial position, liquidity, or the results of operations is not expected to be material.

In addition to the environmental matters described above, Equistar is subject to other material regulatory requirements, including those relating to the shipment or exportation of its products. Although Equistar has compliance programs and other processes intended to ensure compliance with all such regulations, Equistar is subject to the risk that its compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could have a material adverse effect on Equistar’s financial position.

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Operating Hazards

The occurrence of material operating problems at Equistar’s facilities, including, but not limited to, the events described below, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or on Equistar as a whole, during and after the period of such operational difficulties. Equistar’s income and cash flow are dependent on the continued operation of its various production facilities and the ability to complete construction projects on schedule.

Although Equistar takes precautions to enhance the safety of its operations and minimize the risk of disruptions, Equistar’s operations, along with those of other members of the chemical industry, are subject to hazards inherent in chemical manufacturing and the related storage and transportation of raw materials, products and wastes. These hazards include: pipeline leaks and ruptures; explosions; fires; severe weather and natural disasters; mechanical failures; unscheduled downtimes; labor difficulties; transportation interruptions; remediation complications; chemical spills; discharges or releases of toxic or hazardous substances or gases; storage tank leaks; other environmental risks; and potential terrorist acts. Some of these hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties.

Furthermore, Equistar is also subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters. Equistar maintains property, business interruption and casualty insurance which it believes is in accordance with customary industry practices, but it is not fully insured against all potential hazards incident to its business, including losses resulting from war risks or terrorist acts. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If Equistar were to incur a significant liability for which it was not fully insured, it could have a material adverse effect on its financial position.

Potential Acquisitions, Divestitures and Joint Ventures

Equistar continuously seeks opportunities to generate value through business combinations, purchases and sales of assets and contractual arrangements or joint ventures. These transactions are intended to result in the realization of synergies, the creation of efficiencies or the generation of cash to reduce debt. To the extent permitted under Equistar’s credit facilities and other debt agreements, some of these transactions may be financed with additional borrowings by Equistar. Although these transactions are expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions are realized, they could adversely affect the results of operations of Equistar in the short term because of the costs associated with such transactions. Other transactions may advance future cash flows from some of Equistar’s businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term.

Effect of any Change in Ownership

Lyondell or Millennium may transfer control of their interests in Equistar or engage in mergers or other business combination transactions with a third party or with the other owner that could result in a change in control of any one of Lyondell, Millennium or Equistar. Because of the unanimous approval requirements in Equistar’s partnership governance structure, any transfer of an interest in Equistar or change of control of any one of Equistar’s owners could affect the governance of Equistar. Equistar cannot predict how a change of owners would affect Equistar’s operations or business.

Unless waived by each of Equistar’s owners, Equistar’s partnership agreement provides that a direct or indirect transfer of an interest in Equistar generally may occur only if the other owner is first offered the opportunity to purchase the interest and, if the transferee is a third party, the transferee has, or in the opinion of a nationally recognized investment bank could reasonably be expected to obtain, an “investment grade” debt rating. However, if interests are transferred in connection with a merger or sale of a majority of the other assets of Lyondell or Millennium, the other owner does not have a right of first option and the investment grade requirement is not applicable.

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The types of transactions described above could involve third parties and/or either Lyondell or Millennium. Equistar’s owners have discussed, and from time to time may continue to discuss, whether in connection with their ordinary course dialogue regarding Equistar’s business or otherwise, transactions which if consummated could result in a transfer or modification, either directly or indirectly, of their ownership interest in Equistar. For example, in August 2002, Lyondell purchased Occidental’s 29.5% ownership interest in Equistar. Equistar cannot be certain that its owners will not sell, transfer or otherwise modify their ownership interest in Equistar, whether in transactions involving third parties and/or the other owner.

Equistar’s credit facility provides that an event of default occurs if Lyondell, Millennium and/or Occidental or their successors (collectively, the “Original Owners”) cease to collectively hold more than 50% of the interests and voting power in Equistar. In addition, an event of default occurs under the credit facility if a party other than an Original Owner (1) acquires a substantial portion of Lyondell’s Governance Committee powers, (2) acquires the right to exercise powers of the Governance Committee that require unanimous consent or (3) owns more than 25% of the interests and voting power in Equistar and has a debt rating below a specified level. An event of default under Equistar’s credit facility would permit the lenders to declare amounts outstanding under the credit facility immediately due and payable, terminate future commitments and proceed against the collateral granted to them to secure the indebtedness under the credit facility, which consists of substantially all of Equistar’s personal property, including inventory. If the lenders under the credit facility accelerated their loans, it could result in a default under Equistar’s outstanding notes, which then could be accelerated. These events of default under Equistar’s credit facility also are events of termination under Equistar’s accounts receivable sales facility. An event of termination under Equistar’s accounts receivable sales facility terminates the accounts receivable sales program such that additional accounts receivable may not be sold under the facility and the then-existing purchasers of accounts receivable would receive all collections from Equistar’s sold accounts receivable until they have collected on their interests in the purchased accounts receivable.

Conflicts of Interest between Equistar and its Owners

Conflicts of interest may arise between Equistar and one or more of its owners when Equistar is faced with decisions that could have different implications for Equistar and its owners. Although Equistar’s partnership agreement requires that any transaction or dealing between Equistar and an owner or one of its affiliates be approved on Equistar’s behalf by the disinterested owner, this does not address all conflicts of interest that may arise. For example, Equistar’s owners are permitted, in certain circumstances, to compete with Equistar. Because Equistar’s owners control it, conflicts of interest arising because of competition between Equistar and an owner could be resolved in a manner adverse to Equistar. All of Equistar’s executive officers are also executive officers of Lyondell. Pursuant to Equistar’s partnership agreement, Equistar’s chief executive officer is designated by Lyondell. It is possible that there will be situations where Equistar’s owners’ interests are in conflict with Equistar’s interests, and Equistar’s owners, acting through the partnership governance committee or through the executive officers, could resolve these conflicts in a manner adverse to Equistar. See “Item 10. Members of the Partnership Governance Committee and Executive Officers of Equistar—The Partnership Agreement.”

Deadlock of Owners

Under the terms of Equistar’s partnership agreement, the partnership governance committee manages and controls Equistar’s business, property and affairs, including the determination and implementation of its strategic direction. Equistar’s partnership governance committee consists of six members, called representatives, three appointed by each owner. Under the partnership agreement, many important decisions, including decisions relating to changes in Equistar’s scope of business, Equistar’s strategic plan, certain capital expenditures and business combinations, among other specified matters, require the unanimous agreement of at least two representatives of each owner. It is possible that, as to unanimous consent items, the partnership governance committee may not reach agreement regarding matters that are very important to Equistar and could be deadlocked. The partnership agreement does not include procedures for resolving deadlocks, unless the deadlock relates to approval of Equistar’s updated strategic plan. If deadlocks cannot be resolved, inaction may result, which could, among other things, result in Equistar losing business opportunities. See “Item 10. Members of the Partnership Governance Committee and Executive Officers of Equistar—The Partnership Agreement.”

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Related Party Transactions

Equistar’s owners and parties related to Equistar’s owners have various agreements and transactions with Equistar. For example, Equistar is party to a shared services arrangement with Lyondell pursuant to which Lyondell provides Equistar with many services that are essential to the administration and management of Equistar’s business, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Accordingly, Equistar depends to a significant degree on Lyondell for the administration of Equistar’s business. If Lyondell did not fulfill its obligations under the shared services arrangement, it would disrupt Equistar’s business and could have a material adverse effect on Equistar’s business and results of operations. In addition, Equistar has product supply agreements with each of its owners and various other related parties, pursuant to which Equistar sells a substantial amount of its products. Equistar expects to continue to derive a significant portion of its business from transactions with these parties. If they are unable or otherwise cease to purchase Equistar’s products, Equistar’s revenues, margins and cash flow could be adversely affected. See “Item 13. Certain Relationships and Related Transactions.”

FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this report are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements can be identified by words such as “estimate,” “believe,” “expect,” “anticipate,” “plan,” “budget” or other words that convey the uncertainty of future events or outcomes. Many of these forward-looking statements have been based on expectations and assumptions about future events that may prove to be inaccurate. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond Equistar’s control. Equistar’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to:

• the cyclical nature of the chemical industry,

• the availability, cost and price volatility of raw materials and utilities,

• uncertainties associated with the United States and worldwide economies, including those due to political tensions in the Middle East and elsewhere,

• current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries,

• industry production capacities and operating rates,

• the supply/demand balances for Equistar’s products,

• competitive products and pricing pressures,

• access to capital markets,

• terrorist acts,

• operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failures, unscheduled downtimes, labor difficulties, transportation interruptions, spills and releases and other environmental risks),

• technological developments, and

• Equistar’s ability to implement its business strategies.

Any of the factors, or a combination of these factors, could materially affect Equistar’s future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of Equistar’s future performance, and Equistar’s actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All forward-looking statements in this Form 10-K are qualified in their entirety by the cautionary statements contained in this section and in this report. See “Items 1 and 2. Business and Properties,” “Risk Factors That May

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Affect Equistar,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market and Regulatory Risk” for additional information about factors that may affect the businesses and operating results of Equistar. These factors are not necessarily all of the important factors that could affect Equistar. Use caution and common sense when considering these forward-looking statements. Equistar does not intend to update these statements unless securities laws require it to do so.

In addition, this report contains summaries of contracts and other documents. These summaries may not contain all of the information that is important to an investor, and reference is made to the actual contract or document for a more complete understanding of the contract or document involved.

NON-GAAP FINANCIAL MEASURES

The body of generally accepted accounting principles is commonly referred to as “GAAP.” For this purpose, a non-GAAP financial measure is generally defined by the Securities and Exchange Commission as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. From time to time Equistar discloses so-called non-GAAP financial measures, primarily EBITDA, or earnings before interest, taxes depreciation and amortization of long-lived assets. The non-GAAP financial measures described herein are not a substitute for the GAAP measures of earnings, for which management has responsibility.

Equistar sometimes uses EBITDA in its communications with investors, financial analysts and the public. Management believes that disclosure of EBITDA can provide useful information to investors, financial analysts and the public in their review of Equistar’s operating performance and liquidity and their comparison of Equistar’s operating performance and liquidity to the operating performance and liquidity of other companies in the same industry and other industries. This is because EBITDA is perceived as a more objective and comparable measure of operating performance and liquidity. For example, interest expense is dependent on the capital structure and credit rating of a company. However, debt levels, credit ratings and, therefore, the impact of interest expense on earnings vary in significance between companies. Similarly, the tax positions of individual companies can vary. Equistar, as a partnership, is not subject to U.S. federal income taxes. Other companies may be subject to U.S. federal or state income taxes as well as income taxes in countries outside of the U.S., and will differ in their abilities to take advantage of tax benefits, with the result that their effective tax rates and tax expense can vary considerably. Finally, companies differ in the age and method of acquisition of productive assets, and thus the relative costs of those assets, as well as in the depreciation (straight-line, accelerated, units of production) method, which can result in considerable variability in depreciation and amortization expense between companies. Thus, for comparison purposes, management believes that EBITDA can be useful as an objective and comparable measure of operating profitability and the contribution of operations to liquidity because it excludes these elements of earnings that do not provide information about the current operations of existing assets. Accordingly, management believes that disclosure of EBITDA can provide useful information to investors, financial analysts and the public in their evaluation of companies’ operating performance and the contribution of operations to liquidity.

Equistar also periodically reports adjusted net income (loss) or adjusted EBITDA, excluding specified items that are unusual in nature or not comparable from period to period and that are included in GAAP measures of earnings. Management believes that excluding these items generally helps investors compare operating performance between two periods. Such adjusted data is always reported with an explanation of the items that are excluded.

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Item 3. Legal Proceedings

Equistar is, from time to time, a defendant in lawsuits, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation cannot be ascertained with any degree of certainty, Equistar does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it currently is involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on its business or financial condition. However, the adverse resolution in any reporting period of one or more of these suits could have a material impact on Equistar’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of co-defendants or others, or by any insurance coverage that may be available.

Although Equistar is involved in numerous and varied legal proceedings, a significant portion of its outstanding litigation arose in four contexts: (1) claims for personal injury or death allegedly arising out of exposure to the products produced by Equistar or located on Equistar’s premises; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; (3) claims for personal injury and/or property damage allegedly arising out of operations and air, noise and water pollution allegedly arising out of operations; and (4) employment related claims.

From time to time Equistar receives notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Although Equistar has not been the subject of significant penalties to date, such alleged violations may become the subject of enforcement actions or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs).

In April 1997, the Illinois Attorney General’s Office filed a complaint in Grundy County, Illinois Circuit Court seeking monetary sanctions for releases into the environment at Millennium’s Morris, Illinois plant in alleged violation of state regulations. The Morris, Illinois plant was contributed to Equistar on December 1, 1997 in connection with the formation of Equistar. Equistar has reached a tentative settlement with the State of Illinois, which includes a civil penalty in the amount of $175,000, and is finalizing the settlement consent decree with the State of Illinois. Equistar does not believe that the ultimate resolution of this complaint will have a material adverse effect on the business or financial condition of Equistar.

In May 2003, the TCEQ notified Equistar that it is seeking a civil penalty of $167,000 in connection with alleged exceedances of permitted emissions at certain cooling towers at Equistar’s Channelview plant. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.

In August 2003, the EPA notified Equistar that it is seeking a civil penalty arising from a 1999 inspection relating to alleged violations of Clean Air Act regulations at Equistar’s Lake Charles plant. Equistar has reached a tentative settlement with the EPA, which includes a civil penalty in the amount of $195,000, and is finalizing the settlement consent decree with the EPA. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.

In connection with the formation of Equistar, Lyondell, Millennium Petrochemicals and Occidental each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed to Equistar. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of December 31, 2003, Equistar had incurred approximately $7 million with respect to the indemnification baskets for the businesses contributed by each of Lyondell and Millennium Petrochemicals and approximately $6 million for the business contributed by Occidental. Pursuant to these indemnification arrangements, Equistar will assume all third party claims relating to the contributed businesses that are filed on or after December 1, 2004 as to Lyondell and Millennium Petrochemicals and May 15, 2005 as to Occidental. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements

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to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar. See “Item 13. Certain Relationships and Related Transactions–Asset Contributions by Lyondell and Affiliates of Millennium and Occidental” for more information regarding these indemnification obligations.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Equistar does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. There is no established public trading market for the partnership interests of Equistar. See “Item 12. Security Ownership of Certain Beneficial Owners and Management” for a listing of the holders of Equistar’s partnership interests.

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	For the year ended December 31,
Millions of dollars	2003			2002			2001			2000		1999
Results of Operations Data:
Sales and other operating revenues	$	6,545		$	5,537		$	5,909		$	7,495	$	5,594
Net income (loss) (a)		(339	)		(1,299	)		(283	)		153		32
Balance Sheet Data:
Total assets		5,028			5,052			6,338			6,614		6,776
Long-term debt		2,314			2,196			2,233			2,158		2,169

(a) The 2002 net loss includes a $1,053 million charge related to goodwill impairment.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto.

In addition to comparisons of annual operating results, Equistar Chemicals, LP (“Equistar”) has included certain “trailing quarter” comparisons of fourth quarter 2003 operating results to third quarter 2003 operating results. Equistar’s businesses are highly cyclical in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into the current business direction of Equistar.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by Chemical Marketing Associates, Incorporated (“CMAI”), except that crude oil and natural gas benchmark price references are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.

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Overview

Equistar produces and markets olefins, including ethylene, propylene, and butadiene; aromatics, including benzene and toluene; and oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”) in its petrochemicals segment. Additionally, Equistar produces and markets polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders in its polymers segment.

In 2003, the chemical industry experienced high and volatile raw material and energy costs, continuing weak demand and ongoing excess industry capacity. Preliminary estimates by CMAI indicate that U.S. industry ethylene demand in 2003 decreased slightly compared to 2002.

Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Equistar. Olefins are produced from two major raw material groups:

• crude oil-based liquids (“liquids”), including naphthas, condensates, and gas oils, the prices of which are generally related to crude oil prices; and

• natural gas liquids (“NGLs”), principally ethane and propane, the prices of which are generally affected by natural gas prices.

Equistar has the ability to shift its ratio of raw materials used in production of olefins to take advantage of the relative costs of liquids and NGLs.

The following table shows the average benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark sales prices for ethylene and co-product propylene, which Equistar produces and sells. The benchmark weighted average cost of ethylene production is based on the estimated average ratio of liquid and NGL raw materials used in U.S. ethylene production and is subject to revision by CMAI.

	Average Benchmark Price for the Year and Percent Change Versus Prior Year Average
	2003	Percent Change		2002	Percent Change		2001
Crude oil – dollars per barrel	31.12	19	%	26.12	2	%	25.73
Natural gas – dollars per million BTUs	5.24	63	%	3.22	(25	)%	4.28
Weighted average cost of ethylene production – cents per pound	19.95	32	%	15.07	(14	)%	17.58
Ethylene – cents per pound	28.50	28	%	22.23	(16	)%	26.33
Propylene – cents per pound	21.42	19	%	18.00	3	%	17.42

As indicated above, raw material and energy costs averaged significantly higher in 2003 than in 2002, putting upward pressure on raw material costs for the chemical industry, including Equistar. In response to the higher raw material and energy costs, Equistar implemented significant sales price increases in 2003 for substantially all of its petrochemicals and polymers products. Raw material and energy cost increases of nearly $1 billion were recovered through sales price increases in 2003. The magnitude of these price increases had a negative effect on product demand, and contributed to Equistar experiencing lower sales volumes, particularly in the second quarter 2003. Although demand recovered during the second half of 2003, sales volumes were lower for the year 2003 compared to 2002.

In 2003, Equistar issued $700 million of new senior unsecured notes, deferring debt maturities, restructured its credit facility and entered into a new receivables sales facility to maintain its liquidity. These actions resulted in $37 million of financing fees and related expenses in 2003.

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In March 2003, Equistar completed transactions involving a 15-year propylene supply arrangement and the sale of its Bayport polypropylene production facility in Pasadena, Texas. Equistar received total cash proceeds of $194 million, including the value of the polypropylene inventory sold. Cash proceeds of $159 million of the total represented a partial prepayment under the long-term propylene supply arrangement. Equistar also took steps in 2003 to refocus its research and development (“R&D”) activities, resulting in the write off of an R&D facility and incurrence of employee severance costs.

Equistar also completed scheduled maintenance turnarounds at its two largest ethylene plants in 2003. While negatively impacting raw material flexibility in 2003, conclusion of these turnarounds increases Equistar’s future production flexibility.

In 2002, compared to 2001, the chemical industry experienced weak demand growth and ongoing excess capacity. For the year 2002, U.S. industry ethylene demand grew 2.8%, compared to 2001, which failed to absorb excess ethylene industry capacity. This continued to put downward pressure on industry prices and as a result, on product margins. Overall, Equistar experienced lower product margins in 2002 than in 2001.

RESULTS OF OPERATIONS

Net Loss—Equistar had a 2003 net loss of $339 million compared to a 2002 net loss of $246 million, before the cumulative effect of an accounting change in 2002. The $93 million higher loss in 2003 included $37 million of refinancing costs, a $12 million loss on the sale of the polypropylene plant, an $11 million charge for the write-off of a polymer R&D facility and $6 million of employee severance costs. The 2002 loss included the negative impact of certain fixed price natural gas and NGL purchase contracts. Equistar’s costs under these contracts were approximately $33 million higher than market-based costs would have been. The remaining $60 million decrease in operating results was primarily due to lower sales volumes, which were only partly offset by higher average product margins in 2003. In addition, selling, general and administrative expenses in 2003 were $27 million higher than in 2002, reflecting higher pension and medical benefit costs and a higher provision for doubtful accounts.

Equistar had a 2002 net loss of $246 million, before the cumulative effect of an accounting change, compared to a 2001 net loss of $283 million. The 2002 loss included the $33 million negative impact of the fixed price natural gas and NGL purchase contracts. The 2001 period included $33 million of goodwill amortization, $22 million of shutdown costs for Equistar’s Port Arthur, Texas polyethylene facility and a $35 million negative impact from the fixed price natural gas and NGL contracts. Apart from these items, the increase in the net loss primarily reflected a $129 million decrease in petrochemicals segment operating income, partly offset by a $112 million improvement in the polymers segment operating loss. Petrochemicals segment operating income decreased as sales prices decreased more than raw material costs, resulting in lower petrochemicals product margins in 2002 compared to 2001. The polymers segment operating loss was reduced as raw material costs, primarily ethylene and propylene, decreased more than the decreases in average polymers product sales prices, resulting in higher polymers product margins in 2002 compared to 2001.

Fourth Quarter 2003 versus Third Quarter 2003

Equistar had a net loss of $104 million in the fourth quarter 2003 compared to a net loss of $40 million in the third quarter 2003. Equistar’s fourth-quarter operations were negatively impacted by an increase in the cost of ethylene production driven by higher prices for raw materials and energy. Equistar responded with price increases, but the timing of the price increases was such that they were insufficient to fully offset the cost increases. The benchmark cost of ethylene production was over 2 cents per pound higher in the fourth quarter 2003 compared to the third quarter 2003, while benchmark ethylene sales prices increased by less than 1 cent per pound. Additionally, a scheduled maintenance turnaround at an ethylene plant during the fourth quarter 2003 had a modest negative impact on operations by affecting Equistar’s ability to optimize its raw material utilization. The fourth quarter 2003 included $18 million of finance charges and $6 million of severance costs, while the third quarter 2003 included the $11 million charge for the write-off of the polymer R&D facility.

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Sales volumes continued to improve during the fourth quarter 2003 versus the third quarter 2003. Sales of ethylene and ethylene derivatives increased by approximately 2 percent. Sales volumes typically decrease in the fourth quarter versus the third quarter.

Segment Data

The following tables reflect selected sales volume data, including intersegment sales volumes, and summarized financial information for Equistar’s business segments.

	For the year ended December 31,
In millions	2003			2002			2001
Selected petrochemicals products:
Olefins (pounds)		16,053			16,815			16,236
Aromatics (gallons)		384			369			366
Polymers products (pounds)		5,389			6,098			5,862
Millions of dollars
Sales and other operating revenues:
Petrochemicals segment	$	6,036		$	4,957		$	5,384
Polymers segment		2,023			1,868			1,980
Intersegment eliminations		(1,514	)		(1,288	)		(1,455	)
Total	$	6,545		$	5,537		$	5,909
Cost of sales:
Petrochemicals segment	$	5,895		$	4,801		$	5,100
Polymers segment		2,006			1,875			2,088
Unallocated – facility closing costs		—			—			22
Intersegment eliminations		(1,514	)		(1,288	)		(1,455	)
Total	$	6,387		$	5,388		$	5,755
Other operating expenses:
Petrochemicals segment	$	17		$	10		$	9
Polymers segment		95			67			78
Unallocated		135			116			166
Total	$	247		$	193		$	253
Operating income (loss):
Petrochemicals segment	$	124		$	146		$	275
Polymers segment		(78	)		(74	)		(186	)
Unallocated		(135	)		(116	)		(188	)
Total	$	(89	)	$	(44	)	$	(99	)

Petrochemicals Segment

Revenues—Revenues of $6.0 billion in 2003 increased 22% compared to revenues of $5.0 billion in 2002 due to higher sales prices partly offset by lower segment sales volumes. Benchmark ethylene prices averaged 28% higher in 2003 compared to 2002 in response to significant increases in the cost of ethylene production, while benchmark propylene sales prices averaged 19% higher. Segment sales volumes decreased 3% in 2003 compared to 2002 due to lower sales to the polymers segment and lower co-product production in 2003. Lower co-product production reflected the scheduled maintenance turnarounds at two major ethylene plants in 2003.

Revenues of $5.0 billion in 2002 decreased 8% compared to revenues of $5.4 billion in 2001 as lower 2002 average sales prices were only partly offset by a 4% increase in sales volumes. Equistar’s sales prices in 2002 averaged 11% lower than in 2001, reflecting lower raw material costs and low demand growth coupled with excess industry capacity. Benchmark ethylene sales prices averaged 22.2 cents per pound in 2002, a 16% decrease

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compared to 2001. These lower ethylene sales prices were slightly offset by higher 2002 propylene sales prices. Benchmark propylene sales prices averaged 3% higher in 2002 than in 2001.

Cost of Sales—Cost of sales of $5.9 billion in 2003 increased 23% compared to $4.8 billion in 2002 due to higher costs of liquid- and NGL-based raw materials and energy in 2003 compared to 2002. The benchmark cost of ethylene production averaged 32% higher in 2003 than in 2002, while benchmark natural gas costs averaged 63% higher.

Cost of sales of $4.8 billion in 2002 decreased 6% compared to $5.1 billion in 2001, or 2% less than the percent decrease in revenues. While the costs of natural gas and NGL raw materials decreased from historically high levels experienced in 2001, other raw material costs, such as heavy liquids, did not decrease similarly.

Operating Income—The operating income for the segment of $124 million in 2003 decreased $22 million compared to operating income of $146 million in 2002. Operating income for 2002 included the $33 million negative effect of the fixed price natural gas and NGL purchase contracts entered into in early 2001. The decrease in 2003 operating income was due to the negative effect of two scheduled maintenance turnarounds and 3% lower sales volumes.

Operating income of $146 million in 2002 decreased $129 million from $275 million in 2001 as sales prices decreased more than raw material costs, resulting in lower product margins. The effect of the lower 2002 product margins was only partly offset by the benefit of a 4% increase in sales volumes, which was in line with industry demand growth.

Polymers Segment

Revenues—Revenues of $2,023 million in 2003 increased 8% compared to revenues of $1,868 million in 2002. The increase was due to a 23% increase in average sales prices partly offset by a 12% decrease in sales volumes. Average sales prices increased in response to higher raw material costs, primarily ethylene, compared to 2002. The average benchmark price of ethylene increased 28% in 2003 compared to 2002. The lower polymers sales volumes reflected the negative effect of the higher sales prices on demand and, to a lesser extent, the sale of the Bayport polypropylene production facility in 2003.

Revenues of $1,868 million in 2002 decreased 6% compared to revenues of $1,980 million in 2001 due to a 9% decrease in average sales prices offset by a 4% increase in sales volumes. Lower sales prices in 2002 reflected generally lower raw material costs compared to 2001. Sales volumes increased due to stronger demand in 2002 compared to 2001.

Cost of Sales—Cost of sales of $2,006 million in 2003 increased 7% compared to $1,875 million in 2002. This increase reflected higher raw material costs, primarily ethylene, offset in part by the effect of the 12% decrease in sales volumes. Benchmark ethylene costs were 28% higher in 2003 compared to 2002.

Cost of sales of $1,875 million in 2002 decreased 10% compared to $2,088 million in 2001. The decrease during 2002 reflected lower raw material costs, primarily ethylene, and lower energy costs, partly offset by the 4% increase in sales volumes. Benchmark ethylene prices were 16% lower and were only partly offset by a 3% increase in benchmark propylene prices in 2002 compared to 2001.

Other Operating Expenses—Other operating expenses were $95 million in 2003 compared to $67 million in 2002. The 2003 increase was primarily due to an $11 million charge related to the write-off of a polymer R&D facility and a $12 million loss on the sale of the Bayport polypropylene production facility.

Operating Loss—The polymers segment had an operating loss of $78 million in 2003 compared to an operating loss of $74 million in 2002. The combined effects of the $11 million write-off and the $12 million loss on sale noted above, as well as the negative effect of the 12% decrease in sales volumes, was substantially offset by higher polymer product margins. Margins increased in 2003 compared to 2002 as higher average sales prices more than offset higher raw material costs.

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The operating loss of $74 million in 2002 decreased $112 million compared to the operating loss of $186 million in 2001. The $112 million improvement was due to higher polymers product margins and, to a lesser extent, higher sales volumes. Margins improved in 2002 compared to 2001, as decreases in sales prices were less than the decreases in polymers raw material costs.

Unallocated Items

The following discusses costs and expenses that were not allocated to the petrochemicals or polymers segments.

Cost of Sales—Equistar discontinued production at its higher-cost Port Arthur, Texas polyethylene facility in February 2001 and shut down the facility. During 2001, Equistar recorded a $22 million charge, which included environmental remediation liabilities of $7 million, other exit costs of $3 million and severance and pension benefits of $7 million for approximately 125 people employed at the Port Arthur facility. The remaining $5 million balance primarily related to the write down of certain assets.

Other Operating Expenses—These include unallocated general and administrative expenses and, in 2001, goodwill amortization. Unallocated expenses were $135 million in 2003, $116 million in 2002 and $166 million in 2001. The increase from 2002 to 2003 was primarily due to an increase in general and administrative expenses due to higher pension and medical benefit costs and a higher provision for doubtful accounts. The decrease from 2001 to 2002 was primarily due to goodwill amortization of $33 million that ceased in 2002. See Note 2 to the Consolidated Financial Statements.

The following discusses items that are not included in operating income, but that affected Equistar’s net income. See Note 15 to the Consolidated Financial Statements.

Other Income (Expense), Net—Other income (expense), net was a net expense of $43 million in 2003 and net income of $2 million in 2002 and $5 million in 2001. The net expense in 2003 was primarily due to $37 million of charges related to refinancing. Equistar incurred a $3 million loss on early debt extinguishment in 2001, which was previously reported as an extraordinary item. See “Accounting and Reporting Changes” below.

Cumulative Effect of Accounting Change—Effective January 1, 2002, Equistar adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. See Note 2 to the Consolidated Financial Statements.

FINANCIAL CONDITION

Operating Activities—Operating activities provided cash of $164 million in 2003, $55 million in 2002 and $230 million in 2001. The $109 million increase in operating cash flow in 2003 compared to 2002 reflects $159 million received by Equistar as a partial prepayment for propylene to be delivered over a period of 15 years in connection with the long-term propylene supply arrangement entered into in March 2003. The cash flow benefit of this prepayment was partially offset by a higher net loss in 2003, excluding the $1.1 billion cumulative effect of an accounting change in 2002.

Cash provided by a net reduction in the controllable components of working capital – accounts receivable, inventory and accounts payable—was comparable, in total, in 2003 to 2002. In 2003, in consideration of discounts offered to certain customers for early payment for product delivered in December 2003, some receivable amounts were collected in December 2003 that otherwise would have been expected to be collected in January 2004, including $41 million from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”). Additionally, in December 2003, Equistar replaced its previous $100 million accounts receivable sales facility with a new $450 million, four-year, accounts receivable sales facility. The balance of Equistar’s accounts receivable sold under the new facility at December 31, 2003 was $102 million compared to $81 million at December 31, 2002 under the previous facility.

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Operations in 2003 also included cash expenditures of $97 million for scheduled maintenance turnarounds at two of Equistar’s largest ethylene plants. Operations in 2002 and 2001 included expenditures of $49 million and $15 million, respectively, for scheduled maintenance turnarounds.

The $175 million decrease in operating cash flow in 2002 compared to 2001 was due to higher cash expenditures in 2002 for scheduled maintenance turnarounds, interest, employee benefits and railcar lease prepayments and a lower benefit from net reductions in the controllable components of working capital. These were partly offset by a $37 million lower loss, before the $1.1 billion cumulative effect of an accounting change in 2002.

Investing Activities—Investing activities used cash of $37 million, $124 million and $107 million in 2003, 2002 and 2001, respectively.

Equistar’s capital expenditures were $106 million in 2003, $118 million in 2002 and $110 million in 2001. The 2003 and 2002 expenditures included $18 million and $47 million, respectively, for purchases of previously leased railcars. Equistar’s level of expenditures during the periods presented reflected reduced discretionary spending in view of the continuing poor business environment. Capital expenditures in these years primarily included reliability improvements and regulatory compliance projects. Equistar’s capital budget for 2004 is $148 million. The increase over 2003 spending is primarily to ensure compliance with new environmental regulations. See “Environmental Matters” below.

On March 31, 2003, concurrent with entering into the long-term propylene supply arrangement, Equistar sold a polypropylene production facility in Pasadena, Texas, for cash proceeds of $35 million. Also in 2003, Equistar sold certain railcars, which had been purchased in 2002, for a total of $34 million and leased the railcars from the buyers under operating lease agreements.

Financing Activities—Financing activities provided cash of $45 million in 2003, used cash of $106 million in 2002, and provided cash of $61 million in 2001. In December 2003, concurrent with entering into the new $450 million accounts receivable sales facility, Equistar entered into a new $250 million, four-year, inventory-based revolving credit facility, which replaced Equistar’s previous $354 million revolving credit facility. The new credit facility has no ratings triggers. At December 31, 2003, the interest rate under the new revolving credit facility was LIBOR plus 2.5%. The new revolving credit facility is secured by a lien on all inventory and certain personal property, including a pledge of accounts receivable.

In April 2003, Equistar issued $450 million of 10.625% senior unsecured notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of term loans under Equistar’s previous $354 million revolving credit facility and prepayment premiums of approximately $17 million. In September 2003, $29 million of Equistar’s medium term notes matured and were repaid using funds borrowed under Equistar’s revolving credit facility. In November 2003, Equistar issued $250 million of 10.625% senior unsecured notes due in 2011. The gross proceeds of $262 million, net of related fees, were used to prepay in full $173 million of the outstanding term loan under Equistar’s previous $354 million revolving credit facility and to repay borrowing under that revolving credit facility.

In March 2003 and March 2002, Equistar obtained amendments to its previous $354 million revolving credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive.

Financing activities in 2002 included the scheduled retirement of $100 million of 9.125% notes.

In August 2001, Equistar completed a $1.5 billion debt refinancing. The refinancing included an amended credit facility consisting of a $500 million secured revolving credit facility and a $300 million secured term loan maturing in August 2007. The refinancing also included the issuance of $700 million of new unsecured 10.125% senior notes maturing in August 2008. The refinancing replaced a $1.25 billion credit facility, $820 million of which was outstanding. A portion of the net proceeds was also used to repay $90 million of Equistar’s medium-term notes that matured on August 30, 2001. The remaining net proceeds were used for general business purposes. The amended credit facility also made certain financial ratio requirements less restrictive. Equistar previously had amended its credit facility in March 2001, easing certain financial ratio requirements.

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As a result of continuing adverse conditions in the industry and its debt service obligations, Equistar made no distributions to partners in 2003, 2002 and 2001.

Liquidity and Capital Resources—At December 31, 2003, Equistar’s long-term debt, including current maturities, totaled $2.3 billion, or approximately 59% of its total capitalization. Equistar had cash on hand of $199 million. In addition, the total amount available at December 31, 2003 under both the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility was approximately $430 million, which gives effect to the borrowing base less a $75 million unused availability requirement and is net of the $102 million sold under the accounts receivable facility and $18 million of outstanding letters of credit under the revolving credit facility. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The new revolving credit facility requires that the unused available amounts under that facility and the $450 million accounts receivable sales facility equal or exceed $75 million through March 30, 2005 and $50 million thereafter or $100 million thereafter if the interest coverage ratio, as defined, is less than 2:1. There was no borrowing under the revolving credit facility at December 31, 2003.

In November 2003, Moody’s Investors Service (“Moody’s”) lowered Equistar’s senior unsecured debt rating from B1 to B2. During 2003, Standard & Poor’s rating service (“S&P”) lowered Equistar’s senior unsecured debt rating from BB to BB-, and, in January 2004, S&P further lowered it from BB- to B+. S&P cited weaker than expected fourth quarter and full year 2003 operating results at Equistar. In January 2004, as a result of Equistar completing the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility, Moody’s and S&P revised Equistar’s outlook from negative to stable. The rating services cited the significant improvement in Equistar’s liquidity provided by these transactions due to the absence of financial covenants and ratings triggers and prudent steps taken by management to extend debt maturities and maintain liquidity in a difficult business environment.

One or more of the rating agencies may reduce Equistar’s ratings in the future, whether as the result of adverse developments affecting Equistar’s business, events beyond Equistar’s control or other reasons cited by the agencies. A downgrade in debt rating could affect Equistar’s trade terms, borrowing costs and its ability to refinance or restructure debt in the future.

Equistar’s ability to pay or refinance its debt will depend on future operating performance, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond its control. Management believes that conditions will be such that cash balances, cash flow from operations, cash generated from higher utilization of the accounts receivable sales facility and funding under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, other contractual obligations, necessary capital expenditures and ongoing operations. However, if future operating cash flows are less than currently anticipated due to raw material prices or other factors, Equistar may be forced to reduce or delay capital expenditures, sell assets, or reduce operating expenses.

Off-Balance Sheet Arrangements—The Securities and Exchange Commission (“SEC”) has described various characteristics to identify contractual arrangements that would fall within the SEC’s definition of off-balance sheet arrangements. Equistar is a party to the following accounts receivable sales facility that has some of those characteristics:

In December 2003, Equistar entered into a new $450 million, four-year, accounts receivable sales facility to replace its previous accounts receivable sales facility. Pursuant to the facility, Equistar sells, through a wholly owned bankruptcy remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of accounts receivable to financial institutions participating in the facility. Equistar is responsible for servicing the receivables. The new accounts receivable sales facility is subject to substantially the same minimum unused availability requirements and covenant requirements as the new inventory-based revolving credit facility. See discussion of “Liquidity and Capital Resources” above and discussion of “Long-Term Debt” below. The breach of these covenants would permit the counterparty to the accounts receivable sales facility to terminate further purchases of Equistar’s accounts receivable. The new facility does not contain ratings triggers. At December 31, 2003 and 2002, the balance of Equistar’s accounts receivable sold under the facilities was $102 million and $81 million, respectively. The facility accelerates availability to the business of cash from product sales that otherwise would have been collected over the normal billing and collection cycle. The availability of the accounts receivable sales facility provides one element of Equistar’s ongoing sources of liquidity and capital resources. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold, but Equistar would in no event be required to repurchase such interest. See Note 4 to the Consolidated Financial Statements for additional accounts receivable information.

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Contractual and Other Obligations—The following table summarizes, as of December 31, 2003, Equistar’s minimum payments for long-term debt, and contractual and other obligations for the next five years and thereafter.

			Payments Due By Period
Millions of dollars	Total		2004		2005		2006		2007		2008		Thereafter
Long-term debt	$	2,314	$	—	$	1	$	150	$	—	$	700	$	1,463
Pension and other postretirement benefits		137		16		19		20		22		23		37
Advances from customers		156		—		16		16		14		14		96
Other noncurrent obligations		66		—		12		8		5		4		37
Other contractual obligations:
Purchase obligations		3,521		230		231		227		218		199		2,416
Operating leases		585		76		60		51		43		41		314
Total	$	6,779	$	322	$	339	$	472	$	302	$	981	$	4,363

Long-Term Debt—The new $250 million inventory-based revolving credit facility and the indentures governing Equistar’s senior notes contain covenants that, subject to certain exceptions, restrict lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain payments, and mergers. The breach of these covenants would permit the lenders or noteholders to declare any outstanding debt immediately payable and would permit the lenders under Equistar’s new credit facility to terminate future lending commitments. The new credit facility is also subject to minimum unused availability requirements—see “Liquidity and Capital Resources” above. Equistar was in compliance with all covenants under these agreements as of December 31, 2003. See Note 9 to the Consolidated Financial Statements for descriptions of Equistar’s long-term debt and credit facility.

Pension and Other Postretirement Benefits—Equistar maintains several defined benefit pension plans and provides postretirement benefits, as described in Note 12 to the Consolidated Financial Statements. At December 31, 2003, the projected benefit obligation for Equistar’s plans exceeded the fair value of plan assets by $58 million. Subject to future actuarial gains and losses, as well as actual asset earnings, Equistar will be required to fund the $58 million, with interest, in future years. Pension contributions were $15 million, $18 million and $7 million for the years 2003, 2002 and 2001, and are estimated to be approximately $17 million for 2004 and 2005, $32 million in 2006 and $20 million in 2007 and 2008. Current projections indicate that contributions will have to be made quarterly, rather than annually, beginning in 2006, resulting in an acceleration of payments in 2006. Other postretirement benefits are unfunded and are paid by Equistar as incurred. Estimates of postretirement benefit payments through 2008 are included in the table above.

Advances from Customers—Equistar received advances from customers in 2003 and in 2002 in connection with long-term sales agreements under which Equistar is obligated to deliver product primarily at cost-based prices. These advances are treated as deferred revenue and will be amortized to earnings over the remaining terms of the respective contracts, which range from 8 to 14 years. The unamortized long-term portion of such advances totaled $156 million and $23 million as of December 31, 2003 and 2002, respectively. See Note 8 to the Consolidated Financial Statements.

Other Noncurrent Obligations—Other noncurrent obligations primarily include deferred compensation arrangements other than pension and postretirement benefits.

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Purchase Obligations—Equistar is a party to various unconditional obligations to purchase products and services, as summarized in the above table. These primarily include commitments for steam and power from a new co-generation facility. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. See “Commitments” section of Note 13 to the Consolidated Financial Statements.

Operating Leases—Equistar leases various facilities and equipment, including railcars, under noncancelable operating lease arrangements for various periods. See Note 10 to the Consolidated Financial Statements for information on Equistar’s operating leases.

CURRENT BUSINESS OUTLOOK

The completion of scheduled maintenance turnarounds at three of Equistar’s largest ethylene plants has better positioned Equistar to take advantage of any recovery in 2004. A fourth ethylene plant will begin a scheduled maintenance turnaround in the first quarter of 2004. Thus far in 2004, Equistar has seen a continuation of the improvement in product sales volumes experienced in the second half of 2003. However, Equistar’s product margins are heavily dependent on hydrocarbons pricing, primarily crude oil and natural gas.

Thus far in 2004, hydrocarbon prices have remained high and volatile. Equistar has responded by implementing product price increases and announcing additional product price increases across the majority of its product lines. Because Equistar products have broad utilization across the economy, external factors, such as the pace of global economic growth, in addition to raw material pricing, will be important factors to Equistar’s financial performance during 2004.

RELATED PARTY TRANSACTIONS

Equistar makes significant sales of product to Lyondell, LYONDELL-CITGO Refining LP (“LCR”), affiliates of Millennium Chemicals Inc (“Millennium”) and affiliates of Occidental Petroleum Corporation, including Occidental Chemical Corporation and Oxy Vinyls, LP (“Oxy Vinyls”). Equistar also provides certain services and raw materials to Lyondell Methanol Company, L.P. (“LMC”), a wholly owned subsidiary of Lyondell. In turn, Equistar makes significant purchases of raw materials and products from LCR and receives significant administrative services from Lyondell.

Prior to August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium, and 29.5% by Occidental. On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in Equistar, increasing its ownership interest in Equistar to 70.5%. As a result of this transaction, Occidental has two representatives on Lyondell’s board of directors and, as of December 31, 2003, Occidental Chemical Holding Corporation owned approximately 22% of Lyondell.

In view of Occidental’s relationship with Lyondell, which owns 70.5% of Equistar, Occidental’s transactions with Equistar subsequent to August 22, 2002 continue to be reported as related party transactions in Equistar’s Consolidated Statements of Income and Consolidated Balance Sheets.

Equistar believes that all such aforementioned related party transactions are effected on terms substantially no more or less favorable than those that would have been agreed upon by unrelated parties on an arm’s length basis. See “Item 13. Certain Relationships and Related Transactions” and Note 3 to the Consolidated Financial Statements for a description of related party transactions.

CRITICAL ACCOUNTING POLICIES

Equistar applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the U.S. Equistar’s more critical accounting policies include those related to long-lived assets, including the costs of major maintenance turnarounds and repairs, and accruals for long-term employee benefit costs such as pension and postretirement costs. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its

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estimates used in the preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment. These critical accounting policies have been discussed with the Equistar Partnership Governance Committee. Equistar’s significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements.

Long-Lived Assets—With respect to long-lived assets, key assumptions include the estimates of useful asset lives and the recoverability of the carrying values of fixed assets and intangible assets as well as the existence of any obligations associated with the retirement of fixed assets. Such estimates could be significantly modified and/or the carrying values of the assets could be impaired by such factors as new technological developments, new chemical industry entrants with significant raw material or other cost advantages, uncertainties associated with the U.S. and world economies, the cyclical nature of the chemical industry, and uncertainties associated with governmental regulatory actions.

Due to temporary decreases in demand for Equistar’s products, certain facilities may remain idle until market conditions improve. Assets that are temporarily idled are tested for impairment at the time they are temporarily idled. Fixed assets with a net book value of approximately $152 million were temporarily idled at December 31, 2003. Those assets continue to be depreciated over their remaining useful lives. No impairments were recorded in 2003, 2002 or 2001 for temporarily idled facilities. Charges of $11 million were recorded in 2003 for abandoned research and development facilities.

Equistar defers the costs of turnaround maintenance and repair activities in excess of $5 million, amortizing such costs over the period until the next expected major turnaround of the affected unit. During 2003, 2002 and 2001, cash expenditures of $97 million, $49 million and $15 million, respectively, were deferred and are being amortized, generally over a period of 5 to 7 years. Amortization in 2003, 2002 and 2001, of previously deferred turnaround costs was $30 million, $24 million and $20 million, respectively.

The estimated useful lives of long-lived assets range from 3 to 30 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $307 million in 2003. If the useful lives of the assets were found to be shorter than originally estimated, depreciation charges would be accelerated.

Additional information on long-lived assets, deferred turnaround costs and related depreciation and amortization appears in Note 6 to the Consolidated Financial Statements.

Long-Term Employee Benefit Costs—The costs to Equistar of long-term employee benefits, particularly pension and postretirement medical and life insurance benefits, are incurred over long periods of time, and involve many uncertainties over those periods. The net periodic benefit cost attributable to current periods is based on several assumptions about such future uncertainties, and is sensitive to changes in those assumptions. It is management’s responsibility, often with the assistance of independent experts, to select assumptions that in its judgment represent its best estimates of the future effects of those uncertainties. It also is management’s responsibility to review those assumptions periodically to reflect changes in economic or other factors that affect those assumptions.

The current benefit service costs, as well as the existing liabilities, for pensions and other postretirement benefits are measured on a discounted present value basis. The discount rate is a current rate, related to the rate at which the liabilities could be settled. Equistar’s assumed discount rate is based on average rates published by Moody’s and Merrill Lynch for high-quality (Aa rating) ten-year fixed income securities. For the purpose of measuring the benefit obligations at December 31, 2003, Equistar lowered its assumed discount rate from 6.5% to 6.25%, reflecting the general decline in market interest rates during 2003. The 6.25% rate also will be used to measure net periodic benefit cost during 2004. A further one percentage point reduction in the assumed discount rate for Equistar would increase Equistar’s benefit obligation for pensions and postretirement benefits by approximately $50 million, and would reduce Equistar’s net income by approximately $7 million annually.

The benefit obligation and the periodic cost of postretirement medical benefits also are measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As of December 31, 2003, the assumed rate of increase was 10.0% for 2004, 7.0% for 2005 through 2007 and 5.0% thereafter. A one percentage point change in the health care cost trend rate assumption would have no significant effect on either the benefit liability or the net periodic cost, due to limits on Equistar’s maximum contribution level under the medical plan.

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The net periodic cost of pension benefits included in expense also is affected by the expected long-term rate of return on plan assets assumption. Investment returns that are recognized currently in net income represent the expected rate of return on plan assets applied to a market-related value of plan assets which, for Equistar, is defined as the market value of assets. The expected rate of return on plan assets is a longer term rate, and is expected to change less frequently than the current assumed discount rate, reflecting long-term market expectations, rather than current fluctuations in market conditions.

Prior to 2003, Equistar’s expected long-term rate of return on plan assets of 9.5% had been based on the average level of earnings that its independent pension investment advisor had advised could be expected to be earned over time. The expectation was based on an asset allocation of 50% U.S. equity securities (11% expected return), 20% non-U.S. equity securities (11.7% expected return), and 30% fixed income securities (6.5% expected return) that had been recommended by the advisor, and had been adopted for the plans. Over the three-year period ended December 31, 2003, Equistar’s actual return on plan assets averaged 0.9% per year. In 2003, Equistar reviewed its asset allocation and expected long-term rate of return assumptions, and obtained an updated asset allocation study from the independent pension investment advisor, including updated expectations for long-term market earnings rates for various classes of investments. Based on this review, Equistar reduced its expected long-term rate of return on plan assets to 8%, and did not significantly change its plan asset allocations.

The actual rate of return on plan assets may differ from the expected rate due to the volatility normally experienced in capital markets. Management’s goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Based on the market value of plan assets at December 31, 2003, a one percentage point decrease in this assumption for Equistar would decrease Equistar’s net income by approximately $1 million annually.

Net periodic pension cost recognized each year includes the expected asset earnings, rather than the actual earnings or loss. As a result of asset earnings significantly below the expected return on plan assets rate over the last several years, the level of unrecognized investment losses, together with the net actuarial gains and losses, is $56 million at December 31, 2003. This unrecognized amount, to the extent it exceeds ten percent of the projected benefit obligation for the respective plan, will be recognized as additional net periodic benefit cost over the average remaining service period of the participants in each plan. This annual amortization charge will be approximately $4 million per year based on the December 31, 2003 unrecognized amount.

Additional information on the key assumptions underlying these benefit costs appears in Note 12 to the Consolidated Financial Statements.

ACCOUNTING AND REPORTING CHANGES

Effective January 1, 2003, Equistar implemented SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Equistar is the classification of gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Equistar incurred a loss of $3 million on the early extinguishment of debt in the year ended December 31, 2001. See Note 2 to the Consolidated Financial Statements.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, effective December 31, 2003, and requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. SFAS No. 132 (Revised 2003) also requires Equistar to disclose pension and postretirement benefit costs in interim-period financial statements beginning in 2004. Equistar increased its pension disclosure to comply with SFAS No. 132 (Revised 2003). See Note 12 to the Consolidated Financial Statements.

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In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of a retiree health benefit plan to make a one-time election to defer recognition of the effects of the new Medicare legislation in accounting for its plans under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or in making disclosures related to its plans required by SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act. Such FASB guidance could require a change in currently reported information. Equistar elected to make the one-time deferral and is currently evaluating the effect of FSP FAS 106-1.

Effective January 1, 2003, Equistar adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets, and SFAS No. 146, Accounting for Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. Equistar’s adoption of the provisions of SFAS No. 143 and SFAS No. 146 had no material impact on its financial statements.

In December 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), primarily to clarify the required accounting for interests in variable interest entities (“VIEs”). This standard replaces FIN 46, Consolidation of Variable Interest Entities, that was issued in January 2003 to address certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. Equistar’s application of FIN 46R has no material impact on its consolidated financial statements.

Effective January 1, 2002, Equistar implemented SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge to earnings that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to Equistar’s indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. As a result of implementing SFAS No. 142, income in 2002 and subsequent years is favorably affected by $33 million annually because of the elimination of goodwill amortization. See Note 2 to the Consolidated Financial Statements.

ENVIRONMENTAL MATTERS

Various environmental laws and regulations impose substantial requirements upon the operations of Equistar. Equistar’s policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) as amended, the Resource Conservation and Recovery Act (“RCRA”) and the Clean Air Act Amendments. Equistar does not specifically track all recurring costs associated with managing hazardous substances and pollution in ongoing operations. Such costs are included in cost of sales. Equistar also makes capital expenditures to comply with environmental regulations. Such capital expenditures totaled approximately $38 million, $14 million and $16 million for 2003, 2002 and 2001, respectively. Capital expenditures increased in 2003 as a result of new emission reduction rules, discussed below, and Equistar currently estimates 2004 and 2005 expenditures at approximately $87 million and $82 million, respectively, including preliminary estimated expenditures for engineering studies related to emission control standards for highly reactive, volatile organic compounds (“HRVOC”). However, Equistar is still completing its assessment of the impact of the proposed HRVOC emission standards.

The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002

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changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. Under the revised 80% standard, Equistar estimates that the incremental capital expenditures would range between $165 million and $200 million. Of these amounts, Equistar’s spending through December 31, 2003 totaled $69 million. However, the above estimate could be affected by increased costs for stricter proposed controls over HRVOCs. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar is still assessing the impact of the new HRVOC control requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Equistar’s MTBE sales represented approximately 3% of its total revenues in 2003. At this time, Equistar cannot predict the impact that these initiatives will have on MTBE margins or volumes longer term, but any effect on Equistar’s financial position, liquidity, or the results of operations is not expected to be material.

Equistar’s accrued liability for environmental remediation as of December 31, 2003 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of loss in excess of the liability recorded for environmental matters.

Item 7A. Disclosure of Market and Regulatory Risk

COMMODITY PRICE RISK

A substantial portion of Equistar’s products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of Equistar’s profitability tend to fluctuate with changes in the business cycle. Equistar tries to protect against such instability through various business strategies. These include utilization of the olefins plants’ raw material flexibility and entering into multi-year processing and sales agreements.

In addition, Equistar at times enters into commodity derivative hedging transactions, primarily price swaps and call options, to help manage its exposure to commodity price risk with respect to purchases of natural gas and crude oil-related raw materials as well as product sales. Market risks created by these derivative instruments and the mark-to-market valuations of open positions are monitored using value at risk. During 2003, 2002 and 2001, the derivative transactions were not significant compared to Equistar’s overall inventory purchases and product sales. At December 31, 2003, the market value of outstanding derivatives and the related value at risk was not material.

INTEREST RATE RISK

During 2003, Equistar repaid its remaining variable rate debt that was outstanding at December 31, 2002, using proceeds of new fixed-rate debt offerings, and had no borrowing outstanding under its inventory-based revolving credit facility as of December 31, 2003. Accordingly, Equistar’s exposure to variable interest rate risk was minimal at December 31, 2003.

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REGULATORY RISK

New air pollution standards promulgated by federal and state regulatory agencies in the U.S., including those specifically targeting the eight-county Houston/Galveston region, will affect a substantial portion of the operating facilities of Equistar. Compliance with these standards will result in increased capital investment during the next several years and higher annual operating costs for Equistar. Revised rules adopted by the regulatory agencies changed the required NOx, reduction levels from 90% to 80%. However, any potential resulting savings from this proposed revision could be offset by the costs of stricter proposed controls over HRVOCs. Equistar is still assessing the impact of these proposed regulations and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. See “Clean Air Act” section of Note 13 to the Consolidated Financial Statements and “Environmental Matters” above.

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Item 8. Financial Statements and Supplementary Data

Index to the Consolidated Financial Statements

	Page
EQUISTAR CHEMICALS, LP
Report of Independent Auditors	35
Consolidated Financial Statements:
Consolidated Statements of Income	36
Consolidated Balance Sheets	37
Consolidated Statements of Cash Flows	38
Consolidated Statements of Partners’ Capital	39
Notes to the Consolidated Financial Statements	40

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REPORT OF INDEPENDENT AUDITORS

To the Partnership Governance Committee

of Equistar Chemicals, LP

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of partners’ capital and of cash flows present fairly, in all material respects, the financial position of Equistar Chemicals, LP (the “Partnership”) and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets.”

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 8, 2004

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EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME

	For the year ended December 31,
Millions of dollars	2003			2002			2001
Sales and other operating revenues:
Trade	$	4,920		$	4,295		$	4,583
Related parties		1,625			1,242			1,326
		6,545			5,537			5,909
Operating costs and expenses:
Cost of sales		6,387			5,388			5,755
Selling, general and administrative expenses		182			155			181
Research and development expenses		38			38			39
Losses on asset dispositions		27			—			—
Amortization of goodwill		—			—			33
		6,634			5,581			6,008
Operating loss		(89	)		(44	)		(99	)
Interest expense		(215	)		(205	)		(192	)
Interest income		8			1			3
Other income (expense), net		(43	)		2			5
Loss before cumulative effect of accounting change		(339	)		(246	)		(283	)
Cumulative effect of accounting change		—			(1,053	)		—
Net loss	$	(339	)	$	(1,299	)	$	(283	)

See Notes to the Consolidated Financial Statements.

36

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

	December 31,
Millions of dollars	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	199		$	27
Accounts receivable:
Trade, net		471			490
Related parties		137			135
Inventories		408			424
Prepaid expenses and other current assets		46			50
Total current assets		1,261			1,126
Property, plant and equipment, net		3,334			3,565
Investments		60			65
Other assets, net		373			296
Total assets	$	5,028		$	5,052
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade	$	462		$	421
Related parties		51			38
Current maturities of long-term debt		—			32
Accrued liabilities		241			223
Total current liabilities		754			714
Long-term debt		2,314			2,196
Other liabilities and deferred revenues		359			221
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,619			1,958
Accumulated other comprehensive loss		(18	)		(37	)
Total partners’ capital		1,601			1,921
Total liabilities and partners’ capital	$	5,028		$	5,052

See Notes to the Consolidated Financial Statements.

37

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the year ended December 31,
Millions of dollars	2003			2002			2001
Cash flows from operating activities:
Net loss	$	(339	)	$	(1,299	)	$	(283	)
Adjustments to reconcile net loss to cash provided by operating activities:
Cumulative effect of accounting change		—			1,053			—
Depreciation and amortization		307			298			319
Deferred maintenance turnaround expenditures		(97	)		(49	)		(15	)
Debt prepayment premiums and charges		30			—			3
Net losses (gains) on asset dispositions		27			—			(3	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		26			(54	)		222
Inventories		4			24			61
Accounts payable		40			99			(129	)
Deferred revenues		147			23			—
Other assets and liabilities, net		19			(40	)		55
Cash provided by operating activities		164			55			230
Cash flows from investing activities:
Expenditures for property, plant and equipment		(106	)		(118	)		(110	)
Proceeds from sales of assets		69			—			10
Other		—			(6	)		(7	)
Cash used in investing activities		(37	)		(124	)		(107	)
Cash flows from financing activities:
Issuance of long-term debt		695			—			981
Repayment of long-term debt		(642	)		(104	)		(91	)
Net repayment under lines of credit		—			—			(820	)
Other		(8	)		(2	)		(9	)
Cash provided by (used in) financing activities		45			(106	)		61
Increase (decrease) in cash and cash equivalents		172			(175	)		184
Cash and cash equivalents at beginning of period		27			202			18
Cash and cash equivalents at end of period	$	199		$	27		$	202

See Notes to the Consolidated Financial Statements.

38

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

	Partners’ Accounts												Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)
Millions of dollars	Lyondell			Millennium			Occidental			Total
Balance at January 1, 2001	$	476		$	1,517		$	1,547		$	3,540		$	—
Net loss		(115	)		(84	)		(84	)		(283	)		—		$	(283	)
Other comprehensive income - minimum pension liability		—			—			—			—			(19	)		(19	)
Other		—			—			—			—			(1	)		(1	)
Comprehensive loss																$	(303	)
Balance at December 31, 2001	$	361		$	1,433		$	1,463		$	3,257		$	(20	)
Net loss		(569	)		(383	)		(347	)		(1,299	)		—		$	(1,299	)
Lyondell purchase of Occidental interest		1,116			—			(1,116	)		—			—
Other comprehensive income - minimum pension liability		—			—			—			—			(17	)		(17	)
Comprehensive loss																$	(1,316	)
Balance at December 31, 2002	$	908		$	1,050		$	—		$	1,958		$	(37	)
Net loss		(239	)		(100	)		—			(339	)		—		$	(339	)
Other comprehensive income - minimum pension liability		—			—			—			—			16			16
Other		—			—			—			—			3			3
Comprehensive loss																$	(320	)
Balance at December 31, 2003	$	669		$	950		$	—		$	1,619		$	(18	)

See Notes to the Consolidated Financial Statements.

39

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Formation of the Partnership and Operations

Equistar Chemicals, LP (“Equistar” or “the Partnership”), a Delaware limited partnership which commenced operations on December 1, 1997, was formed by Lyondell Chemical Company and subsidiaries (“Lyondell”) and Millennium Chemicals Inc. and subsidiaries (“Millennium”). On May 15, 1998, Equistar was expanded with the contribution of certain assets from Occidental Petroleum Corporation and subsidiaries (“Occidental”). Until August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental. On August 22, 2002, Lyondell purchased Occidental’s interest in Equistar and, as a result, Lyondell’s ownership interest in Equistar increased to 70.5%.

Equistar owns and operates the petrochemicals and polymers businesses originally contributed by Lyondell, Millennium and Occidental. The petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Olefins include ethylene, propylene and butadiene, and oxygenated products include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”). The petrochemicals segment also includes the production and sale of aromatics, including benzene and toluene. The polymers segment manufactures and markets polyolefins, including high-density polyethylene (“HDPE”), low-density polyethylene (“LDPE”), linear low-density polyethylene (“LLDPE”), polypropylene and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. The performance polymers include enhanced grades of polyethylene, including wire and cable insulating resins, and polymeric powders.

Equistar is governed by a Partnership Governance Committee consisting of six representatives, three appointed by each general partner. Most of the significant decisions of the Partnership Governance Committee require unanimous consent, including approval of the Partnership’s strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the Partnership. Distributions are made to the partners based upon their percentage ownership of Equistar. Additional cash contributions required by the Partnership are also based upon the partners’ percentage ownership of Equistar.

2. Summary of Significant Accounting Policies

Basis of Presentation—The consolidated financial statements include the accounts of Equistar and its wholly owned subsidiaries.

Revenue Recognition—Revenue from product sales is recognized as risk and title to the product transfer to the customer, which usually occurs when shipment is made.

Cash and Cash Equivalents—Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates fair value. Equistar’s policy is to invest cash in conservative, highly rated instruments and to limit the amount of credit exposure to any one institution.

Equistar has no requirements for compensating balances in a specific amount at a specific point in time. The Partnership does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at Equistar’s discretion. As a result, none of Equistar’s cash is restricted.

Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method, except for materials and supplies, which are valued using the average cost method.

Inventory exchange transactions, which involve fungible commodities and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful asset lives, generally 25 years for major manufacturing equipment, 30 years for buildings, 10 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information systems equipment. Upon retirement or sale, Equistar removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in the Consolidated Statements of Income. Equistar’s policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year.

Long-Lived Asset Impairment—Equistar evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell the assets.

Investments—Equistar’s investments primarily consist of a 50% interest in a joint venture that owns an ethylene glycol facility in Beaumont, Texas (“PD Glycol”). The investment in PD Glycol is accounted for using the equity method of accounting.

Turnaround Maintenance and Repair Costs—Costs of maintenance and repairs exceeding $5 million incurred in connection with turnarounds of major units at Equistar’s manufacturing facilities are deferred and amortized using the straight-line method over the period until the next planned turnaround, generally 5 to 7 years. These costs are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units.

Identifiable Intangible Assets—Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over periods of 3 to 10 years.

Other intangible assets are carried at amortized cost and primarily consist of deferred debt issuance costs, licensed technology and other long-term processing rights and costs. These assets are amortized using the straight-line method over their estimated useful lives or the term of the related agreement, if shorter.

Environmental Remediation Costs—Anticipated expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Estimated expenditures have not been discounted to present value.

Income Taxes—The Partnership is not subject to federal income taxes as income is reportable directly by the individual partners; therefore, there is no provision for income taxes in the accompanying financial statements.

Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounting and Reporting Changes—Effective January 1, 2003, Equistar implemented Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Equistar is the classification of gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Equistar incurred a loss of $3 million on the early extinguishment of debt in the year ended December 31, 2001.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, effective December 31, 2003, and requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. SFAS No. 132 (Revised 2003) also requires Equistar to disclose pension and postretirement benefit costs in interim-period financial statements beginning in 2004. Equistar increased its pension disclosure to comply with SFAS No. 132 (Revised 2003). See Note 12.

In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of a retiree health benefit plan to make a one-time election to defer recognition of the effects of the new Medicare legislation in accounting for its plans under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or in making disclosures related to its plans required by SFAS No. 132 (Revised 2003), until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act. Such FASB guidance could require a change in currently reported information. Equistar elected to make the one-time deferral and is currently evaluating the effect of the FSP FAS 106-1.

Effective January 1, 2003, Equistar adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets, and SFAS No. 146, Accounting for Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. Equistar’s adoption of the provisions of SFAS No. 143 and SFAS No. 146 had no material impact on its financial statements.

In December 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), primarily to clarify the required accounting for interests in variable interest entities (“VIEs”). This standard replaces FIN 46, Consolidation of Variable Interest Entities, that was issued in January 2003 to address certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. Equistar’s application of FIN 46R has no material impact on its consolidated financial statements.

Effective January 1, 2002, Equistar implemented SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge to earnings that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to Equistar’s indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value.

As a result of implementing SFAS No. 142, income in 2002 and subsequent years is favorably affected by $33 million annually because of the elimination of goodwill amortization. The following table presents Equistar’s results of operations for all periods presented as adjusted to eliminate goodwill amortization.

	For the year ended December 31,
Millions of dollars	2003			2002			2001
Reported income (loss) before cumulative effect of accounting change	$	(339	)	$	(246	)	$	(283	)
Add back: goodwill amortization		—			—			33
Adjusted income (loss) before cumulative effect of accounting change	$	(339	)	$	(246	)	$	(250	)
Reported net income (loss)	$	(339	)	$	(1,299	)	$	(283	)
Add back: goodwill amortization		—			—			33
Adjusted net income (loss)	$	(339	)	$	(1,299	)	$	(250	)

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Reclassifications—Certain previously reported amounts have been reclassified to conform to classifications adopted in 2003.

3. Related Party Transactions

As a result of Lyondell’s August 2002 purchase of Occidental’s interest in Equistar (see Note 1), Occidental has two representatives on Lyondell’s board of directors and, as of December 31, 2003, Occidental owned approximately 22% of Lyondell. In view of Occidental’s representation on Lyondell’s Board of Directors and its ownership position with Lyondell, which owns 70.5% of Equistar, Occidental’s transactions with Equistar subsequent to August 22, 2002 will continue to be reported as related party transactions in Equistar’s Consolidated Statements of Income and Consolidated Balance Sheets.

Product Transactions with Lyondell—Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. With the exception of one pre-existing third-party product supply agreement expiring in 2015, Lyondell is required, under the agreements, to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities from Equistar. Lyondell licenses MTBE technology to Equistar, and purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices. Lyondell also purchases natural gas used in its methanol facility from Equistar.

Through December 31, 2003, Equistar acted as sales agent for the methanol products of Lyondell. Equistar also provides operating and other services for Lyondell, including the lease to Lyondell by Equistar of the real property on which the methanol plant is located. Pursuant to the terms of those agreements, Lyondell paid Equistar a management fee and reimbursed certain expenses of Equistar at cost.

Product Transactions with Millennium—Equistar sells ethylene to Millennium at market-related prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium is required to purchase 100% of its ethylene requirements for its LaPorte, Texas facility from Equistar. The initial term of the contract expired December 31, 2000. It continues thereafter for one-year periods unless either party serves notice twelve months in advance. The contract will continue, at a minimum, through December 31, 2005.

Also, under an agreement entered into in connection with the formation of Equistar, Equistar is required to purchase 100% of its vinyl acetate monomer raw material requirements at market-related prices from Millennium for the production of ethylene vinyl acetate products at its LaPorte, Texas; Clinton, Iowa and Morris, Illinois plants. This contract expired December 31, 2000 and renews annually. Equistar has provided notice to Millennium to terminate the vinyl acetate monomer agreement, effective December 31, 2004.

Product Transactions with Occidental—In connection with the contribution of Occidental assets to Equistar, Equistar and Occidental entered into a long-term agreement for Equistar to supply substantially all of the ethylene requirements for Occidental’s U.S. manufacturing plants at market-related prices. The ethylene is exclusively for internal use in production at these plants, less a specified quantity per year tolled in accordance with the provisions of the agreement. Either party has the option to “phase down” volumes over time. However, a “phase down” cannot begin until January 1, 2009 and the annual required minimum cannot decline to zero prior to December 31, 2013, unless certain specified force majeure events occur. In addition to ethylene, Equistar sells methanol, ethers and glycols to Occidental. Equistar also purchases various other products from Occidental at market-related prices.

Product Transactions with Oxy Vinyls, LP—During 2003, Equistar sold ethylene to Oxy Vinyls, LP (“Oxy Vinyls”), a joint venture partnership between Occidental and an unaffiliated party, for Oxy Vinyls’ LaPorte, Texas facility at market-related prices pursuant to an agreement that expired December 31, 2003.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Transactions with LYONDELL-CITGO Refining LP—Equistar has product sales and raw material purchase agreements with LYONDELL-CITGO Refining LP (“LCR”), a joint venture investment of Lyondell. Certain olefins by-products are sold by Equistar to LCR for processing into gasoline and certain refinery products are sold by LCR to Equistar as raw materials. Equistar also has processing and storage arrangements with LCR and provides certain marketing services for LCR. All of the agreements between LCR and Equistar are on terms generally representative of prevailing market prices.

Shared Services Agreement with Lyondell—Under a shared services agreement, Lyondell provides office space and various services to Equistar including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar for Equistar’s share of the cost of such services. Direct costs, incurred exclusively for Equistar, also are charged to Equistar. Costs related to a limited number of shared services, primarily engineering, continue to be incurred by Equistar. In such cases, Equistar charges Lyondell for its share of such costs.

Shared Services and Shared-Site Agreements with Millennium—Equistar and Millennium have agreements under which Equistar provides utilities and fuel streams to Millennium. In addition, Millennium provides Equistar with certain operational services, including utilities, as well as barge dock access and related services.

Lease Agreements with Occidental—Equistar subleases certain railcars from Occidental. In addition, Equistar leases its Lake Charles facility and the land related thereto from Occidental – see “Leased Facility” section of Note 13.

Related party transactions are summarized as follows:

	For the year ended December 31,
Millions of dollars	2003		2002		2001
Equistar billed related parties for:
Sales of products and processing services:
Lyondell	$	610	$	459	$	405
Occidental		448		358		441
LCR		467		340		377
Millennium		46		43		55
Oxy Vinyls		55		42		48
Shared services and shared site agreements:
LCR		3		4		3
Lyondell		18		16		18
Millennium		8		9		17
Natural gas purchased for Lyondell		98		76		86
Related parties billed Equistar for:
Purchases of products:
LCR	$	227	$	218	$	203
Millennium		10		10		15
Lyondell		5		1		4
Occidental		1		1		1
Shared services, transition and lease agreements:
Lyondell		154		134		135
Millennium		15		16		19
Occidental		7		7		6
LCR		—		1		2

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Accounts Receivable

Equistar sells its products primarily to other chemical manufacturers in the petrochemicals and polymers industries. Equistar performs ongoing credit evaluations of its customers’ financial condition and, in certain circumstances, requires letters of credit from them. The Partnership’s allowance for doubtful accounts, which is reflected in the accompanying Consolidated Balance Sheets as a reduction of accounts receivable, totaled $12 million and $16 million at December 31, 2003 and 2002, respectively.

In December 2003, Equistar entered into a new $450 million, four-year, accounts receivable sales facility to replace Equistar’s previous $100 million accounts receivable sales facility. Pursuant to the facility, Equistar sells, through a wholly owned bankruptcy remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of accounts receivable to financial institutions participating in the facility. Equistar is responsible for servicing the receivables.

At December 31, 2003 and 2002, the balance of Equistar’s accounts receivable sold under the facilities was $102 million and $81 million, respectively. Accounts receivable in the Consolidated Balance Sheets are reduced by the sales of interests in the pool. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold. Increases and decreases in the amount sold are reflected in operating activities in the Consolidated Statements of Cash Flows. Fees related to the sales are included in “Other income (expense), net” in the Consolidated Statements of Income. The new accounts receivable sales facility is subject to substantially the same minimum unused availability requirements and covenant requirements as the new inventory-based revolving credit facility, which is secured by a pledge of accounts receivable. See Note 9. The new facility does not contain ratings triggers.

5. Inventories

Inventories consisted of the following components at December 31:

Millions of dollars	2003		2002
Finished goods	$	223	$	233
Work-in-process		12		12
Raw materials		83		85
Materials and supplies		90		94
Total inventories	$	408	$	424

The excess of the current cost of inventories over book value was approximately $101 million at December 31, 2003. In December 2003, Equistar entered into a $250 million, four-year, inventory-based revolving credit facility. See Note 9.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Property, Plant and Equipment and Other Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:

Millions of dollars	2003			2002
Land	$	76		$	80
Manufacturing facilities and equipment		6,015			6,037
Construction in progress		63			60
Total property, plant and equipment		6,154			6,177
Less accumulated depreciation		(2,820	)		(2,612	)
Property, plant and equipment, net	$	3,334		$	3,565

During 2003, Equistar refocused certain polymer research and development (“R&D”) programs, resulting in a charge of $11 million to write off the net book value of certain R&D facilities at Equistar’s Morris, Illinois plant that was shutdown at the end of 2003. Also in 2003, Equistar sold a polypropylene production facility in Pasadena, Texas for a loss of $12 million. The effects of these transactions were included in “Losses on asset dispositions” in the Consolidated Statements of Income.

Equistar did not capitalize any interest during 2003, 2002 and 2001 with respect to construction projects.

The components of other assets, at cost, and the related accumulated amortization were as follows at December 31:

	2003							2002
Millions of dollars	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Intangible assets:
Turnaround costs	$	249	$	(77	)	$	172	$	193	$	(94	)	$	99
Software costs		153		(85	)		68		150		(66	)		84
Debt issuance costs		45		(11	)		34		43		(13	)		30
Catalyst costs		34		(20	)		14		23		(11	)		12
Other		70		(16	)		54		58		(17	)		41
Total intangible assets	$	551	$	(209	)		342	$	467	$	(201	)		266
Pension asset							18							21
Other							13							9
Total other assets						$	373						$	296

Scheduled amortization of these intangible assets for the next five years is estimated to be $58 million in 2004, $53 million in 2005, $49 million in 2006, $39 million in 2007 and $29 million in 2008.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Depreciation and amortization expense is summarized as follows:

	For the year ended December 31,
Millions of dollars	2003		2002		2001
Property, plant and equipment	$	246	$	242	$	237
Goodwill		—		—		33
Turnaround costs		30		24		20
Software costs		16		15		12
Other		15		17		17
Total depreciation and amortization	$	307	$	298	$	319

In addition, amortization of debt issuance costs of $7 million, $7 million and $2 million in 2003, 2002 and 2001, respectively, is included in interest expense in the Consolidated Statements of Income.

7. Accrued Liabilities

Accrued liabilities consisted of the following components at December 31:

Millions of dollars	2003		2002
Taxes other than income	$	74	$	65
Interest		64		65
Contractual obligations		30		34
Payroll and benefits		27		42
Deferred revenues		14		—
Other		32		17
Total accrued liabilities	$	241	$	223

8. Deferred Revenues

In March 2003, Equistar received an advance of $159 million, representing a partial prepayment for product to be delivered under a long-term product supply arrangement, primarily at cost-based prices. Equistar will recognize this deferred revenue over 15 years, as the associated product is delivered.

In December 2002, Equistar received a $25 million initial advance from a customer in connection with a long-term product supply agreement under which Equistar is obligated to deliver product at cost-based prices. Equistar will recognize this deferred revenue as the product is delivered, which is expected to be over 9 years.

Trade sales and other operating revenues included $12 million in 2003 and $2 million in 2002 representing deferred revenue earned in those periods.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Long-Term Debt

Long-term debt consisted of the following at December 31:

Millions of dollars	2003		2002
Bank credit facility:
Inventory-based revolving credit facility	$	—	$	—
Revolving credit facility		—		—
Term loan due 2007		—		296
Other debt obligations:
Medium-term notes due 2003-2005		1		30
Senior Notes due 2004, 8.50%		—		300
Notes due 2006, 6.50%		150		150
Senior Notes due 2008, 10.125%		700		700
Senior Notes due 2009, 8.75%		600		600
Senior Notes due 2011, 10.625%		700		—
Debentures due 2026, 7.55%		150		150
Other		3		3
Unamortized premium (discount), net		10		(1	)
Total		2,314		2,228
Less current maturities		—		32
Total long-term debt	$	2,314	$	2,196

The term loan due 2007, which was paid in full in 2003, had a weighted-average interest rate of 4.80%, 5.25% and 6.26% during 2003, 2002 and 2001, respectively. The medium-term notes had a weighted-average interest rate of 9.51% at December 31, 2003 and 9.75% at December 31, 2002 and 2001.

The 6.5% notes and the 7.55% debentures were assumed by Equistar from Lyondell when Equistar was formed in 1997. As between Equistar and Lyondell, Equistar is primarily liable for this debt. Lyondell is a guarantor of the 6.5% notes and the 7.55% debentures. The consolidated financial statements of Lyondell are filed as an exhibit to Equistar’s Annual Report on Form 10-K for the year ended December 31, 2003.

Aggregate maturities of long-term debt during the next five years are $1 million in 2005; $150 million in 2006; $700 million in 2008 and $1.5 billion thereafter. There are no scheduled maturities of long-term debt in 2004 and 2007.

In December 2003, Equistar entered into a new $250 million, four-year, inventory-based revolving credit facility which replaced Equistar’s previous $354 million revolving credit facility. The total amount available at December 31, 2003 under both the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility (see Note 4) was approximately $430 million, which gives effect to the borrowing base less a $75 million unused availability requirement and is net of the $102 million sold under the accounts receivable facility and $18 million of outstanding letters of credit under the revolving credit facility. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The new revolving credit facility requires that the unused available amounts under that facility and the $450 million accounts receivable sales facility equal or exceed $75 million through March 30, 2005 and $50 million thereafter or $100 million thereafter if the interest coverage ratio, as defined, is less than 2:1. At December 31, 2003, the interest rate under the new inventory-based revolving credit facility was LIBOR plus 2.5%. The new revolving credit facility is secured by a lien on all inventory and certain personal property, including a pledge of accounts receivable. There was no borrowing under the new revolving credit facility at December 31, 2003.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In November 2003, Equistar issued $250 million of 10.625% senior unsecured notes due in 2011. The proceeds, net of related fees, were used to prepay in full $173 million of the outstanding term loan under Equistar’s previous credit facility and to repay borrowing under Equistar’s previous $354 million revolving credit facility. In September 2003, $29 million of Equistar’s medium term notes matured and were repaid using funds borrowed under Equistar’s revolving credit facility. In April 2003, Equistar issued $450 million of 10.625% senior unsecured notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of term loans under Equistar’s credit facility and prepayment premiums of approximately $17 million.

In March 2003 and 2002, Equistar obtained amendments to its previous $354 million revolving credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive.

During October 2002, Equistar entered into an agreement to sell certain accounts receivable and received cash proceeds of $100 million. See Note 4. Equistar used the $100 million proceeds to reduce borrowing under the previous $354 million revolving credit facility and for general corporate purposes.

The new $250 million revolving credit facility and the indentures governing Equistar’s senior unsecured notes contain covenants that, subject to certain exceptions, restrict lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain payments, and mergers. The new credit facility does not require Equistar to maintain specified financial ratios. The breach of these covenants would permit the lenders to declare any outstanding debt immediately payable, and would permit the lenders under Equistar’s credit facility to terminate future lending commitments. Equistar was in compliance with all such covenants as of December 31, 2003.

10. Lease Commitments

Equistar leases various facilities and equipment under noncancelable operating lease arrangements for various periods. Operating leases include leases of railcars used in the distribution of products in Equistar’s business.

At December 31, 2003, future minimum lease payments relating to noncancelable operating leases with lease terms in excess of one year were as follows:

Millions of dollars	Minimum Lease Payments
2004	$	76
2005		60
2006		51
2007		43
2008		41
Thereafter		314
Total minimum lease payments	$	585

Operating lease net rental expense was $106 million, $125 million and $110 million for the years ending December 31, 2003, 2002 and 2001, respectively. Net rental expense in 2002 included $21 million of amortization of lease prepayments related to certain railcar leases that were terminated as of December 31, 2003.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Financial Instruments and Derivatives

The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to Equistar for debt with terms and average maturities similar to Equistar’s debt portfolio, the fair value of Equistar’s long-term debt, including amounts due within one year, was approximately $2,459 million and $2,031 million at December 31, 2003 and 2002, respectively.

Equistar is exposed to credit risk with respect to accounts receivable. Equistar performs ongoing credit evaluations of its customers and, in certain circumstances, requires letters of credit from the customers. See Note 4.

12. Pension and Other Postretirement Benefits

All full-time regular employees are covered by defined benefit pension plans sponsored by Equistar. In connection with the formation of Equistar, no pension assets or obligations were contributed to Equistar, with the exception of union represented plans contributed by Occidental and Millennium.

Retirement benefits are based upon years of service and the employee’s highest three consecutive years of compensation during the last ten years of service. Equistar funds the plans through periodic contributions to pension trust funds. Equistar also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the U.S. tax-qualified plans’ limits. In addition, Equistar sponsors unfunded postretirement benefit plans other than pensions, which provide medical and life insurance benefits. The postretirement medical plans are contributory while the life insurance plans are, generally, noncontributory. The life insurance benefits are provided to employees who retired before July 1, 2002. The measurement date for Equistar’s pension and other postretirement benefit plans is December 31, 2003.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of these plans:

	Pension Benefits						Other Postretirement Benefits
Millions of dollars	2003			2002			2003			2002
Change in benefit obligation:
Benefit obligation, January 1	$	170		$	147		$	108		$	112
Service cost		17			16			3			2
Interest cost		10			11			7			7
Plan amendments		—			(2	)		—			(13	)
Actuarial loss (gain)		1			8			5			2
Benefits paid		(8	)		(10	)		(4	)		(2	)
Benefit obligation, December 31		190			170			119			108
Change in plan assets:
Fair value of plan assets, January 1		102			107
Actual return on plan assets		23			(13	)
Partnership contributions		15			18
Benefits paid		(8	)		(10	)
Fair value of plan assets, December 31		132			102
Funded status		(58	)		(68	)		(119	)		(108	)
Unrecognized actuarial and investment loss		56			76			12			7
Unrecognized prior service cost		(2	)		(2	)		12			14
Net amount recognized	$	(4	)	$	6		$	(95	)	$	(87	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid benefit cost	$	18		$	21		$	—		$	—
Accrued benefit liability		(42	)		(51	)		(95	)		(87	)
Accumulated other comprehensive income		20			36			—			—
Net amount recognized	$	(4	)	$	6		$	(95	)	$	(87	)
Additional Information:
Accumulated benefit obligation for defined benefit plans, December 31	$	158		$	142
Increase (decrease) in minimum liability included in other comprehensive loss		(16	)		17

Pension plans with projected benefit obligations and accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

Millions of dollars	2003		2002
Projected benefit obligation	$	171	$	150
Accumulated benefit obligations		139		123
Fair value of assets		109		81

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net periodic pension and other postretirement benefit costs included the following components:

	Pension Benefits									Other Postretirement Benefits
Millions of dollars	2003			2002			2001			2003		2002		2001
Components of net periodic benefit cost:
Service cost	$	17		$	16		$	16		$	3	$	2	$	2
Interest cost		10			11			10			7		7		6
Actual (gain) loss on plan assets		(23	)		13			6			—		—		—
Less-unrecognized gain (loss)		15			(24	)		(17	)		—		—		—
Recognized gain on plan assets		(8	)		(11	)		(11	)		—		—		—
Amortization of actuarial and investment loss		7			4			2			—		—		—
Prior service cost		—			—			—			2		2		—
Net effect of curtailments, settlements and special termination benefits		—			—			3			—		—		2
Net periodic benefit cost	$	26		$	20		$	20		$	12	$	11	$	10

The assumptions used in determining the net benefit liability were as follows at December 31:

	Pension Benefits		Other Postretirement Benefits
	2003	2002	2003	2002
Weighted-average assumptions as of December 31:
Discount rate	6.25%	6.50%	6.25%	6.50%
Rate of compensation increase	4.50%	4.50%

The assumptions used in determining net benefit cost were as follows at December 31:

	Pension Benefits						Other Postretirement Benefits
	2003		2002		2001		2003		2002		2001
Weighted-average assumptions for the year:
Discount rate	6.50	%	7.00	%	7.50	%	6.50	%	7.00	%	7.50	%
Expected return on plan assets	8.00	%	9.50	%	9.50	%
Rate of compensation increase	4.50	%	4.50	%	4.50	%

Management’s goal is to manage pension investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Targeted asset allocations of 55% U.S. equity securities, 15% non-U.S. equity securities, and 30% fixed income securities were adopted in 2003 for the plans based on recommendations by its independent pension investment advisor. Investment policies prohibit investments in securities issued by Equistar or an affiliate, such as Lyondell or Millennium, or investment in speculative derivative instruments. The investments are marketable securities that provide sufficient liquidity to meet expected benefit obligation payments.

The expected rate of return on plan assets is a longer term rate, and is expected to change less frequently than the current assumed discount rate, reflecting long-term market expectations, rather than current fluctuations in market conditions. Prior to 2003, Equistar’s expected long-term rate of return on plan assets of 9.5% had been based on the average level of earnings that its independent pension investment advisor had advised could be expected to be

52

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

earned over time, using the expected returns for the above-noted asset allocations that had been recommended by the advisor, and had been adopted for the plans. Over the three-year period ended December 31, 2003, Equistar’s actual return on plan assets was a gain averaging 0.9% per year. In 2003, Equistar reviewed its asset allocation and expected long-term rate of return assumptions, and obtained an updated asset allocation study from the independent pension investment advisor, including updated expectations for long-term market earnings rates for various classes of investments. Based on this review, Equistar reduced its expected long-term rate of return on plan assets to 8%, and did not significantly change its plan asset allocations.

Equistar’s pension plan weighted-average asset allocations by asset category were as follows at December 31:

Asset Category:	2003 Policy		2003		2002
U.S. equity securities	55	%	53	%	48	%
Non-U.S. equity securities	15	%	18	%	20	%
Fixed income securities	30	%	29	%	32	%
Total	100	%	100	%	100	%

Equistar expects to contribute approximately $17 million to its pension plan in 2004.

As of December 31, 2003, future expected benefit payments, which reflect expected future service, as appropriate, were as follows:

Millions of dollars	Pension Benefits		Other Benefits
2004	$	10	$	6
2005		12		7
2006		13		7
2007		14		8
2008		15		8
2009 through 2013		92		47

The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2003 was 10.0% for 2004, 7.0% for 2005 through 2007 and 5.0% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Equistar’s maximum contribution level under the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 2003 by less than $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended.

Equistar also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Equistar were $12 million, $13 million and $16 million for the years ended December 31, 2003, 2002 and 2001, respectively.

13. Commitments and Contingencies

Commitments—Equistar has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for Equistar’s businesses and at prevailing market prices. See also Note 3, describing related party commitments.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Equistar is party to various unconditional purchase obligation contracts as a purchaser for products and services, principally for steam and power. At December 31, 2003, future minimum payments under those contracts with noncancelable contract terms in excess of one year and fixed minimum payments were as follows:

Millions of dollars
2004	$	230
2005		231
2006		227
2007		218
2008		199
Thereafter through 2023		2,416
Total minimum contract payments	$	3,521

Equistar’s total purchases under these agreements were $244 million and $230 million for the years ended December 31, 2003 and 2002, respectively.

Leased Facility—Equistar’s Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. The facility and land, which are included in property, plant and equipment at a net book value of $152 million, are leased from Occidental. In May 2003, Equistar and Occidental entered into a new one-year lease, which has renewal provisions for two additional one-year periods at either party’s option.

Indemnification Arrangements—Lyondell, Millennium and Occidental have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar has agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. From formation through December 31, 2003, Equistar had incurred a total of $20 million for these claims and liabilities. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar.

Environmental Remediation—Equistar’s accrued liability for environmental matters as of December 31, 2003 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liability recorded for environmental remediation.

Clean Air Act—The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002 changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. Under the revised 80% standard, Equistar estimates that the incremental capital expenditures would range between $165 million and $200 million. Of these amounts, Equistar’s spending through December 31, 2003 totaled $69 million. However, the above estimate could be affected by increased costs for stricter proposed controls over HRVOCs. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar is still assessing the impact of the new HRVOC control

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

General—Equistar is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect on the financial position, liquidity or results of operations of Equistar.

14. Supplemental Cash Flow Information

Supplemental cash flow information is summarized as follows for the periods presented:

	For the year ended December 31,
Millions of dollars	2003		2002		2001
Cash paid for interest	$	208	$	200	$	171

15. Segment Information and Related Information

Equistar operates in two reportable segments, petrochemicals and polymers (see Note 1). The accounting policies of the segments are the same as those described in “Summary of Significant Accounting Policies” (see Note 2). No customer accounted for 10% or more of sales during any year in the three-year period ended December 31, 2003.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information concerning Equistar’s reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were based on current market prices.

Millions of dollars	Petrochemicals		Polymers			Unallocated			Eliminations			Consolidated
For the year ended December 31, 2003:
Sales and other operating revenues:
Customers	$	4,522	$	2,023		$	—		$	—		$	6,545
Intersegment		1,514		—			—			(1,514	)		—
		6,036		2,023			—			(1,514	)		6,545
Operating income (loss)		124		(78	)		(135	)		—			(89	)
Total assets		3,388		1,283			357			—			5,028
Capital expenditures		74		32			—			—			106
Depreciation and amortization expense		228		57			22			—			307
For the year ended December 31, 2002:
Sales and other operating revenues:
Customers	$	3,669	$	1,868		$	—		$	—		$	5,537
Intersegment		1,288		—			—			(1,288	)		—
		4,957		1,868			—			(1,288	)		5,537
Operating income (loss)		146		(74	)		(116	)		—			(44	)
Total assets		3,410		1,438			204			—			5,052
Capital expenditures		58		59			1			—			118
Depreciation and amortization expense		217		58			23			—			298
For the year ended December 31, 2001:
Sales and other operating revenues:
Customers	$	3,929	$	1,980		$	—		$	—		$	5,909
Intersegment		1,455		—			—			(1,455	)		—
		5,384		1,980			—			(1,455	)		5,909
Operating income (loss)		275		(186	)		(188	)		—			(99	)
Total assets		3,474		1,400			1,464			—			6,338
Capital expenditures		84		24			2			—			110
Depreciation and amortization expense		204		58			57			—			319

The following table presents the details of “Operating income (loss)” as presented above in the “Unallocated” column for the years ended December 31, 2003, 2002 and 2001.

Millions of dollars	2003			2002			2001
Items not allocated to petrochemicals and polymers:
Principally general and administrative expenses	$	(135	)	$	(116	)	$	(166	)
Other		—			—			(22	)
Operating income (loss)	$	(135	)	$	(116	)	$	(188	)

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the details of “Total assets” as presented above in the “Unallocated” column as of December 31, for the years indicated:

Millions of dollars	2003		2002		2001
Cash and cash equivalents	$	199	$	27	$	202
Accounts receivable—trade and related parties		2		—		17
Prepaid expenses and other current assets		17		22		20
Property, plant and equipment, net		13		18		23
Goodwill, net		—		—		1,053
Other assets, net		126		137		149
Total assets	$	357	$	204	$	1,464

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Equistar performed an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer (principal executive officer) and Vice President and Controller (principal financial officer), of the effectiveness of Equistar’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 31, 2003. Based upon that evaluation, the Chief Executive Officer and the Vice President and Controller concluded that Equistar’s disclosure controls and procedures are effective.

There were no changes in Equistar’s internal control over financial reporting that occurred during Equistar’s last fiscal quarter (the fourth quarter of 2003) that have materially affected, or are reasonably likely to materially affect, Equistar’s internal control over financial reporting.

PART III

Item 10. Members of the Partnership Governance Committee and Executive Officers of Equistar

Partnership Governance Committee

A Partnership Governance Committee (the “Governance Committee”) manages and controls the business, property and affairs of Equistar, including the determination and implementation of Equistar’s strategic direction. The general partners exercise their authority to manage and control Equistar only through the Governance Committee, subject to delegation to the executive officers discussed below. The Governance Committee consists of six members, called representatives, three appointed by each general partner. The participation rights of any general partner’s representatives may be curtailed to the extent that the general partner or its affiliates cause a default under the partnership agreement. See “The Partnership Agreement” below.

The following biographical information is furnished with respect to each of the members of the Governance Committee. The information includes age as of March 1, 2004, present position, if any, with Equistar, period served as a member of the Governance Committee, and other business experience during at least the past five years.

Dan. F. Smith, 57

Mr. Smith has been a member and Co-Chairman of the Governance Committee since December 1997 and has been Chief Executive Officer of Equistar since December 1997. Mr. Smith has been a director of Lyondell since October 1988. He has been President of Lyondell since August 1994 and Chief Executive Officer of Lyondell since December 1996. Mr. Smith was Chief Operating Officer of Lyondell from May 1993 to December 1996. Prior thereto, Mr. Smith held various senior executive positions with Lyondell and Atlantic Richfield Company (“ARCO”), including Executive Vice President and Chief Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for Lyondell and the Lyondell Division of ARCO. Mr. Smith is a director of Cooper Industries, Inc.

Robert E. Lee, 47

Mr. Lee has been a member and Co-Chairman of the Governance Committee since July 2003. Mr. Lee has served as President and Chief Executive Officer of Millennium since July 2003. He was Executive Vice

58

	President-Growth and Development of Millennium from March 2001 to July 2003. He was President and Chief Executive Officer of Millennium Inorganic Chemicals from June 1997 to March 2001. From October 1996 (when Millennium was formed) to June 1997, he served as the President and Chief Operating Officer of Millennium. Mr. Lee has been a director of Millennium since its inception. Mr. Lee was a director and the Senior Vice President and Chief Operating Officer of Hanson Industries from June 1995 until the formation of Millennium, an Associate Director of Hanson from 1992 until the formation of Millennium, Vice President and Chief Financial Officer of Hanson Industries from 1992 to June 1995, Vice President and Treasurer of Hanson Industries from 1990 to 1992, and Treasurer of Hanson Industries from 1987 to 1990. He joined Hanson Industries in 1982.
C. William Carmean, 51	Mr. Carmean has been a member of the Governance Committee since August 2003. Mr. Carmean has served as Senior Vice President, General Counsel and Secretary of Millennium since January 2002. He was Vice President-Legal of Millennium from December 1997 to December 2001. He was Associate General Counsel of Millennium from the inception of Millennium to December 1997, Associate General Counsel of Hanson Industries from 1993 to the formation of Millennium, and Corporate Counsel of Quantum Chemical Corporation from 1990 until its acquisition by Hanson in 1993.
T. Kevin DeNicola, 49	Mr. DeNicola has been a member of the Governance Committee since May 1998. Mr. DeNicola was appointed Senior Vice President and Chief Financial Officer of Lyondell effective as of June 30, 2002. Prior thereto, he served as Vice President, Corporate Development of Lyondell since April 1998, overseeing strategic planning. From 1996 until April 1998, Mr. DeNicola was Director of Investor Relations of Lyondell. Mr. DeNicola served as Ethylene Products Manager of Lyondell from 1993 until 1996. Mr. DeNicola also serves as a member of the Partnership Governance Committee of LCR.
Kerry A. Galvin, 43	Ms. Galvin has been a member of the Governance Committee since May 2002. Ms. Galvin was appointed Senior Vice President, General Counsel and Secretary of Lyondell in May 2002. Prior thereto, she served as Vice President, General Counsel and Secretary since July 2000. Ms. Galvin has responsibility for legal and governmental affairs for the Lyondell enterprise. Ms. Galvin originally joined Lyondell in 1990 and held various positions in the legal department prior to July 2000, including Associate General Counsel with responsibility for international legal affairs.
John E. Lushefski, 48	Mr. Lushefski has been a member of the Governance Committee since December 1997. Mr. Lushefski was Senior Vice President and Chief Financial Officer of Millennium from 1996 to July 2003, and has been Executive Vice President and Chief Financial Officer of Millennium since July 2003.

Audit Committee Financial Experts

The Governance Committee functions similar to a board of directors of a publicly-held corporation. In addition, because the Governance Committee does not have a separately designated audit committee, the entire Governance Committee performs the functions that generally would be performed by an audit committee of a publicly-held corporation. The Governance Committee has determined that Equistar has at least one “audit committee financial expert,” as defined in Item 401(h) of Regulation S-K, serving on the Governance Committee. The Governance Committee has determined that Messrs. DeNicola, Lee, Lushefski and Smith each qualify as an audit committee

59

financial expert. However, because Equistar is managed by its owners through their representation on the Governance Committee and because of the significant commercial relationships between Equistar and its owners, Messrs. DeNicola, Lee, Lushefski and Smith do not satisfy the definition of independence contained in Section 303A of the New York Stock Exchange listing standards. See “Item 13. Certain Relationships and Related Transactions” for a description of the commercial relationships between Equistar and its owners.

The Partnership Agreement

Equistar’s partnership agreement governs, among other things, Equistar’s management, ownership, cash distributions and capital contributions. The following is a summary of the material provisions of Equistar’s partnership agreement.

Actions Requiring Unanimous Voting

Unless approved by two or more representatives of each of Lyondell and Millennium, the Governance Committee may not take any actions that would permit or cause Equistar, any of its subsidiaries, or any person acting in the name of or on behalf of any of them, directly or indirectly, whether in a single transaction or a series of related transactions, to:

• engage, participate or invest in any business outside the scope of Equistar’s business as described in the partnership agreement;

• approve any strategic plan, as well as any amendments or updates to the strategic plan, including the annual update described under “—Strategic Plans and Preparation of an Annual Budget” below;

• authorize any disposition of assets having a fair market value exceeding $30 million in any one transaction or a series of related transactions not contemplated in an approved strategic plan;

• authorize any acquisition of assets or any capital expenditure exceeding $30 million that is not contemplated in an approved strategic plan;

• require capital contributions to Equistar within any fiscal year if the total of contributions required from the partners within that year would exceed $100 million, or if the total of contributions required from the partners within that year and the immediately preceding four years would exceed $300 million, other than contributions (1) contemplated by the asset contribution agreements for each of Lyondell and Millennium, (2) contemplated by an approved strategic plan or (3) required to achieve or maintain compliance with health, safety and environmental laws;

• authorize the incurrence of debt for borrowed money, unless (1) the debt is to refinance all or a portion of Equistar’s credit facility as contemplated below, (2) after giving effect to the incurrence of the debt and any related transactions, Equistar would be expected to have an “investment grade” debt rating by Moody’s and S&P or (3) the debt is incurred to refinance the public or bank debt assumed or incurred by Equistar as contemplated by documents relating to Equistar’s formation and the contribution of the Occidental contributed business or to refinance any such refinancing debt; and in the case of each of the three exceptions above, the agreement relating to the debt does not provide that the transfer by a partner of its partnership interests, or a change of control with respect to any partner or any of its affiliates, would either (1) constitute a default under the debt instruments, (2) otherwise accelerate the maturity of the debt or (3) give the lender or holder any “put rights” or similar rights with respect to the debt instrument;

however, unanimous consent is not required for Equistar to refinance any of its synthetic or capitalized leases in effect on March 31, 2002 with debt for borrowed money if the amount of the debt incurred does not in the aggregate exceed the amount required to terminate the synthetic or capitalized lease;

• make borrowings under one or more of Equistar’s bank credit facilities, uncommitted lines of credit or any credit facility or debt instruments that refinances all or any portion of Equistar’s credit facility or facilities, at any time, if, as a result of any such borrowing, the aggregate principal amount of all such borrowings outstanding at that time would exceed $1.75 billion;

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• enter into interest rate protection or other hedging agreements, other than hydrocarbon hedging agreements in the ordinary course of business;

• enter into any capitalized lease or off-balance sheet financing arrangements involving payments, individually or in the aggregate, by Equistar in excess of $30 million in any fiscal year;

• cause Equistar or any of its subsidiaries to issue, sell, redeem or acquire any partnership interests in Equistar or other equity securities, or any rights to acquire, or any securities convertible into or exchangeable for, partnership interests or other equity securities;

• make cash distributions from Equistar in excess of Available Net Operating Cash, as defined below under “—Distribution of Available Net Operating Cash to Equistar’s Partners,” or to make non-cash distributions, except as provided in the partnership agreement in respect of a dissolution or liquidation;

• appoint or discharge executive officers, other than the Chief Executive Officer, based on the recommendation of the Chief Executive Officer;

• approve material compensation and benefit plans and policies, material employee policies and material collective bargaining agreements for Equistar’s employees;

• initiate or settle any litigation or governmental proceedings if the effect of the litigation or proceedings would be material to Equistar’s financial condition;

• change Equistar’s independent accountants;

• change Equistar’s method of accounting as adopted in the partnership agreement or make tax elections under the Internal Revenue Code of 1986, as amended, determined to be appropriate by the Governance Committee;

• create or change the authority of any auxiliary committee;

• merge, consolidate or convert Equistar or any of its subsidiaries with or into any other entity, other than a wholly owned subsidiary of Equistar;

• engage in certain bankruptcy and reorganization actions specified in the partnership agreement;

• exercise any of the powers or rights described below under “—Transactions with Affiliates” with respect to a business conflict involving either (1) LCR, its successors or assigns, (2) Lyondell Methanol Company, L.P. (“LMC”), its successors or assigns or (3) any other affiliate of any of the general partners, if the affiliate’s actions with respect to the conflict circumstance are not controlled by Lyondell or Millennium, other than a business conflict involving the exercise of any rights and remedies with respect to a default under any agreement that is the subject of the conflict; or

• repay any of Equistar’s long-term debt or any of its long-term synthetic leases that are treated as debt for purposes of federal income tax if, by doing so, the aggregate amount of all such indebtedness would be reduced below $1.825 billion prior to May 15, 2005, and thereafter, below $1.5 billion.

Although unanimous approval by all six members of the Governance Committee is never required, the requirements described above are referred to as “unanimous voting requirements” because two representatives of each of the general partners must agree on any action taken in respect of the enumerated matters.

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Transactions with Affiliates

Except as described above under “—Actions Requiring Unanimous Voting,” if a business conflict caused by any transaction or dealing between Equistar, or any of its subsidiaries, and one or more of its general partners, or any of their affiliates, occurs, the other general partner will have sole and exclusive power, at Equistar’s expense, to both (1) control all decisions, elections, notifications, actions, exercises or non-exercises and waivers of all rights, privileges and remedies provided to, or possessed by, Equistar with respect to the conflict and (2) retain and direct legal counsel and to control, assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise or waive any and all claims, disputes and actions if any potential, threatened or asserted claim, dispute or action about a conflict occurs. Any action by the Governance Committee with respect to such a conflict, except as described above under “—Actions Requiring Unanimous Voting,” will require the approval of at least two representatives of the uninvolved general partner, and the representatives of the interested general partner will have no votes.

Strategic Plans and Preparation of an Annual Budget

Equistar is managed under a five-year strategic business plan which is updated annually under the direction of the Chief Executive Officer and presented for approval by the Governance Committee no later than 90 days before the start of the first fiscal year covered by the updated plan. The strategic plan must be approved each year by at least two representatives of each of the general partners. The strategic plan establishes Equistar’s strategic direction, including: plans relating to capital maintenance and enhancement; geographic expansion, acquisitions and dispositions; new product lines; technology; long-term supply and customer arrangements; internal and external financing; environmental and legal compliance; and plans, programs and policies relating to compensation and industrial relations.

In addition, Equistar’s executive officers prepare an annual budget for each fiscal year. Each annual budget includes an operating budget and capital expenditure budget. Each annual budget must be consistent with the information for its fiscal year included in the most recently approved strategic plan. Unless otherwise provided in the most recently approved strategic plan, each annual budget utilizes a format and provides a level of detail consistent with Equistar’s previous annual budget.

Equistar’s executive officers have prepared the 2004 five-year strategic plan and the 2004 annual budget and presented these items to the Governance Committee for approval. The proposed 2004 annual budget incorporated amounts for shared services under the shared services arrangement consistent with the expected continuation of the shared service arrangement. See “Item 13. Certain Relationships and Related Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.” As of the date of this filing, the Governance Committee has not taken action on the proposed 2004 five-year strategic plan or the 2004 annual budget. Pending Governance Committee action on these items, Equistar’s executive officers are using the proposed 2004 annual budget to track and manage Equistar’s current performance.

There is no assurance that the Governance Committee will approve the 2004 five-year strategic plan and the 2004 annual budget. If the Governance Committee determines not to approve a strategic plan and annual budget, the deadlock provisions described below under “Governance Committee Deadlock Over the Strategic Plan” will become applicable.

If for any fiscal year the Governance Committee fails to approve an updated strategic plan, for that year and each subsequent year before the approval of an updated strategic plan, Equistar’s executive officers will prepare and promptly furnish to the Governance Committee an annual budget consistent with the projections and other information for that year included in the strategic plan most recently approved. The Chief Executive Officer, acting in good faith, shall be entitled to modify any annual budget (1) to satisfy current contractual and compliance obligations and/or (2) to account for other changes in circumstances resulting from the passage of time or the occurrence of events beyond Equistar’s control.

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The Chief Executive Officer is not authorized to cause Equistar to proceed with capital expenditures to accomplish capital enhancement projects except to the extent that the expenditures would enable Equistar to continue or complete any capital project reflected in the last strategic plan that was approved by the Governance Committee.

After a strategic plan and an annual budget have been approved by the Governance Committee, or an annual budget has been developed as described above in cases where an updated strategic plan has not yet been approved, the Chief Executive Officer is authorized, without further action by the Governance Committee, to cause Equistar to make expenditures consistent with the updated strategic plan and annual budget, provided that all internal control policies and procedures, including those regarding the required authority for expenditures, shall have been followed.

Governance Committee Deadlock Over the Strategic Plan

If the Governance Committee has not agreed upon and approved an updated strategic plan by 12 months after the beginning of the first fiscal year that would have been covered by the plan, then Equistar’s general partners are required to submit to a non-binding dispute resolution process. The general partners are required to continue the dispute resolution process until either (1) agreement is reached by the general partners, acting through their representatives, on an updated strategic plan or (2) at least 24 months have elapsed since the beginning of the first fiscal year that was to be covered by the first updated strategic plan for which agreement was not reached and one general partner determines and notifies the other general partner in writing that no agreement resolving the dispute is likely to be reached. Following receipt of notice described above, either general partner may elect to dissolve Equistar. There is no assurance that a Governance Committee deadlock would not have a material adverse effect on Equistar.

Distribution of Available Net Operating Cash to Equistar’s Partners

The partnership agreement provides that Equistar must distribute to the partners, as soon as practicable following the end of each month, all Available Net Operating Cash, as defined below.

“Available Net Operating Cash” is defined in the partnership agreement, at the relevant time of determination, as (1) all cash and cash equivalents on hand as of the most recent month’s end, plus the excess, if any, of Equistar’s targeted level of indebtedness over Equistar’s actual indebtedness as of that month’s end, less (2) the Projected Cash Requirements, if any, as of that month’s end, as determined by the executive officers. The targeted level of indebtedness is shown in the most recently updated strategic plan. The actual indebtedness is determined according to generally accepted accounting principles and represents all short term and long term debt.

“Projected Cash Requirements” means, for the 12-month period following any month’s end, the excess, if any, of the sum of Equistar’s:

• (1) forecast capital expenditures; (2) forecast cash payments for taxes, debt service, including principal and interest payment requirements and other non-cash credits to income; and (3) forecast cash reserves for future operations or other requirements;

over the sum of:

• (1) forecast net income; (2) forecast depreciation, amortization, other non-cash charges to income, interest expense and tax expenses, in each case to the extent deducted in determining net income; (3) forecast decreases in working capital or minus forecast increases in working capital; and (4) forecast cash proceeds of disposition of assets, net of expenses.

Equistar’s Projected Cash Requirements are calculated, subject to changes in certain circumstances, consistently with the most recently updated strategic plan.

Distributions to the partners of cash or property arising from Equistar’s liquidation would be made according to the capital account balances of the partners. Unless otherwise agreed by the general partners not involved with a business conflict as described under “—Transactions with Affiliates” above, any amount otherwise distributable to a partner as described above will be applied by Equistar to satisfy obligations to Equistar resulting from a partner’s or

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its affiliate’s failure to (1) pay any interest or principal when due on any indebtedness for borrowed money to Equistar, (2) make any indemnification payment required by its asset contribution agreement that has been finally determined to be due or (3) make any capital contribution required by the partnership agreement, other than as required by the applicable asset contribution agreement.

Indemnification of Each Partner

Equistar has agreed, to the fullest extent permitted by applicable law, to indemnify, defend and hold harmless each partner, its affiliates and its respective officers, directors and employees. This indemnification is from, against and in respect of any liability which the indemnified person may sustain, incur or assume as a result of, or relative to, any third-party claim arising out of or in connection with Equistar’s business, property or affairs. This indemnification does not apply to the extent that it is finally determined that the third-party claim arose out of or was related to actions or omissions of the indemnified partner, its affiliates or any of their respective officers, directors or employees acting in those capacities constituting a breach of the partnership agreement or any related agreement. This indemnification obligation is not intended to, nor will it, affect or take precedence over the indemnity provisions contained in any related agreement. See “Item 13. Certain Relationships and Related Transactions—Asset Contributions by Lyondell and Affiliates of Millennium and Occidental.”

Transfers and Pledges of a Partner’s Interest in Equistar

Without the consent of the general partners, no partner may transfer less than all of its interest in Equistar, nor can any partner transfer its interest other than for cash. If one of the limited partners and its affiliated general partner desire to transfer, via a cash sale, all of their units, they must give written notice to Equistar and the other partners and the non-selling partners shall have the option, exercisable by delivering written acceptance notice of the exercise to the selling partners within 45 days after receiving notice of the proposed sale, to elect to purchase all of the partnership interests of the selling partners on the terms described in the initial notice. If all of the other non-selling partners deliver notice of acceptance, then all of the partnership interests shall be transferred in proportion to the partners’ current percentage interest unless otherwise agreed. If less than all of the non-selling partners deliver notice of acceptance, the partner who delivers notice of acceptance will have the option of purchasing all of the partnership interests up for sale. The notice of acceptance will set a date for closing the purchase which is not less than 30 nor more than 90 days after delivery of the notice of acceptance, subject to extension. The purchase price for the selling partners’ partnership interests will be paid in cash.

If the non-selling partners do not elect to purchase the selling partners’ partnership interests within 45 days after the receipt of initial notice of the proposed sale, the selling partners will have a further 180 days during which they may consummate the sale of their units to a third-party purchaser. The sale to a third-party purchaser must be at a purchase price and on other terms that are no more favorable to the purchaser than the terms offered to the non-selling partners. If the sale is not completed within the 180-day period, the initial notice will be deemed to have expired, and a new notice and offer shall be required before the selling partners may make any transfer of their partnership interests.

Before the selling partners may consummate a transfer of their partnership interests to a third party under the partnership agreement, the selling partners must demonstrate that the person willing to serve as the proposed purchaser’s guarantor must have outstanding indebtedness that is rated investment grade by Moody’s and S&P’s. If the proposed guarantor has no rated indebtedness outstanding, it shall provide an opinion from a nationally recognized investment banking firm that it could be reasonably expected to obtain suitable ratings. In addition, a partner may transfer its partnership interests only if, together with satisfying all other requirements (1) the transfer is accomplished in a nonpublic offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations, (2) the transfer does not cause a default under any material contract to which Equistar is a party or by which Equistar or any of its properties is bound, (3) the transferee executes an appropriate agreement to be bound by the partnership agreement, (4) the transferor and/or the transferee bears all reasonable costs incurred by Equistar in connection with the transfer, (5) the guarantor of the transferee delivers an agreement to the ultimate parent entity of the non-selling partners and to Equistar substantially in the form of the parent agreement and (6) the proposed transferor is not in material default in the timely performance of any of its material obligations to Equistar.

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A partner will not in any transaction or series of actions, directly or indirectly, pledge all or any part of its partnership interest. However, a partner may at any time assign its right to receive distributions from Equistar so long as the assignment does not purport to assign any (1) right of the partner to participate in or manage Equistar’s affairs, (2) right of the partner to receive any information or accounting of Equistar’s affairs, (3) right of the partner to inspect Equistar’s books or records or (4) other right of a partner under the partnership agreement or the Delaware Revised Uniform Limited Partnership Act.

In addition, except for any restrictions imposed by the parent agreement described below under “The Parent Agreement,” nothing in Equistar’s partnership agreement will prevent the transfer or pledge by the owner of any capital stock, equity ownership interests or other security of the partner or any affiliate of a partner.

The partnership agreement specifically provides for transfers of a partner’s partnership interest to an affiliate without consent of the other partners. A general partner may transfer all of its units in the partnership to another general partner that is its affiliate if this transfer would not cause Equistar’s dissolution. A limited partner may transfer its units as follows:

• up to 99% of its units may be transferred to a general partner that is its affiliate, whereupon the limited partner units so transferred will become general partner units;

• up to 99% of its units may be transferred to another limited partner that is its affiliate; and

• all of its units may be transferred to another limited partner that is its affiliate if this transfer would not cause Equistar’s dissolution.

In addition, any partner may transfer all of its partnership interest in Equistar to one of its wholly owned affiliates that is not at that time a partner if the transferee executes an instrument reasonably satisfactory to all of the general partners accepting the partnership agreement.

Business Opportunities Which Must be Offered to Equistar

Except as described below, each partner’s affiliates are free to engage in or possess an interest in any other business of any type and to avail themselves of any business opportunity available to it without having to offer Equistar or any partner the opportunity to participate in that business. If a partner’s affiliate desires to initiate or pursue an opportunity to undertake, engage in, acquire or invest in a “related business,” as defined in the partnership agreement, that partner or its affiliate will offer Equistar the business opportunity. A related business is any business related to (1) the manufacturing, marketing and distribution of the types of olefins, polyolefins, ethyl alcohol, ethyl ether and ethylene oxide, ethylene glycol and derivatives of ethylene oxide and ethylene glycol that are specifically set forth in the partnership agreement, (2) the purchasing, processing and disposing of raw materials in connection with the manufacturing, marketing and distributing of the chemicals identified in clause (1) above and (3) any research and development in connection with clauses (1) and (2) above.

When a proposing partner offers a business opportunity to Equistar, Equistar will elect to do one of the following within a reasonably prompt period: (1) acquire or undertake the business opportunity for its benefit as a whole, at its cost, expense and benefit or (2) permit the proposing partner to acquire or undertake the business opportunity for its own benefit and account without any duty to Equistar or the other partners.

If the business opportunity is in direct competition with Equistar’s then-existing business and Equistar does not elect to acquire or undertake the business opportunity for its own benefit, then the proposing partner and Equistar shall, if either so elects, seek to negotiate and implement an arrangement whereby Equistar would either (1) acquire or undertake the competing opportunity at the sole cost, expense and benefit of the proposing partner under a mutually acceptable arrangement or (2) enter into a management agreement with the proposing partner to manage the competing opportunity on behalf of the proposing partner on terms and conditions mutually acceptable to the proposing partner and Equistar. Under clause (1) above, the competing opportunity will be treated as a separate business within Equistar.

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If Equistar and the proposing partner do not reach agreement as to an arrangement, the proposing partner may acquire or undertake the competing opportunity for its own benefit and account without any duty to Equistar or the other partners.

In addition, if the business opportunity constitutes less than 25% of an acquisition of or investment in assets, activities, operations or businesses that is not otherwise a related business, then a proposing partner may acquire or invest in a business opportunity without first offering it to Equistar. The 25% figure is based on annual revenues for the most recently completed fiscal year. After completion of the above acquisition or investment, the proposing partner must offer the business opportunity to Equistar under the terms described above. If Equistar elects to pursue the business opportunity, it will be acquired by Equistar at its fair market value as of the date of the acquisition.

If Equistar is presented with an opportunity to acquire or undertake a business opportunity that it determines not to acquire or undertake, and the representatives of one general partner, but not the other general partner, desires that Equistar acquire or undertake the business opportunity, then Equistar will permit the general partner and its affiliates to acquire or undertake such business opportunity, and the business opportunity shall be treated in the same manner as if the general partner and its affiliates were a proposing partner with respect to the business opportunity.

Amendment of Partnership Agreement

All waivers, modifications, amendments or alterations of the partnership agreement require the written approval of all of the partners in Equistar.

The Parent Agreement

Lyondell, Millennium and Equistar are parties to an amended and restated parent agreement dated November 6, 2002. The following is a summary of the material provisions of the parent agreement.

Guarantee of Obligations Under the Partnership Agreement and Related Party Agreements

Pursuant to the parent agreement, each of Lyondell and Millennium (the “Parents”) has guaranteed, undertaken and promised to cause the due and punctual payment and the full and prompt performance of all of the amounts to be paid and all of the terms and provisions under various agreements, including, without limitation, the partnership agreement and the asset contribution agreements, to be performed or observed by or on the part of certain of their respective subsidiaries, including subsidiaries that are Equistar’s partners, and any other direct or indirect subsidiary of any of the Parents that are parties to these agreements. These subsidiaries collectively are referred to as the “Affiliated Obligors.” The entities that are the limited partners and general partners collectively are referred to as the “Partner Subs.” Additionally, for purposes of agreements related to the partnership that predate August 22, 2002, the term “Affiliated Obligors” includes affiliates of any of Oxy CH Corporation, Occidental Chemical Corporation or Occidental Chemical Holding Corporation if any such affiliate was a party to those related agreements. Insofar as the provisions described in this subsection apply to agreements other than the partnership agreement and the parent agreement, the term “Affiliated Obligors” will not include Equistar or any partner of Equistar in its capacity as a partner. The parent agreement provides expressly that the parent guarantees inure solely to the benefit of the beneficiaries specified in the parent agreement, which consist of Equistar, Lyondell and Lyondell’s Affiliated Obligors and Millennium and Millennium’s Affiliated Obligors. The parent agreement also states that nothing in the agreement confers upon any other person any rights, benefits or remedies by reason of the parent agreement.

Conflict Circumstance

The partnership agreement includes definitions of “Conflict Circumstance,” “Conflicted General Partner” and “Nonconflicted General Partner” and provides that the Nonconflicted General Partners have some exclusive rights to control Equistar with respect to any Conflict Circumstance, generally involving a transaction between Equistar and an affiliate of one of its partners. The guarantee provisions described above do not apply to the parents of the general partners that direct Equistar in connection with these Conflict Circumstances, so that the parents of a Nonconflicted General Partner are not effectively guaranteeing Equistar’s performance of contracts with other parents. However, a parent of a Nonconflicted General Partner may have liability for Equistar’s failure to perform

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in circumstances where that failure was caused by an act or failure to act of its Partner Sub. Without limiting the rights of the Partner Subs under the partnership agreement, and without prejudice to any rights, remedies or defenses Equistar may have in any other agreement or Conflict Circumstance, each Parent has agreed to cause each of its Partner Subs to both (1) cause Equistar to pay, perform and observe all of the terms and provisions of other agreements to be paid, performed or observed by or on the part of Equistar under the agreements, according to their terms to the extent that the Partner Sub is a Nonconflicted General Partner and is thereby entitled to cause the payment, performance and observance of the terms and provisions and (2) except to the extent inconsistent with its obligations above, abide by its obligations as a Nonconflicted General Partner with respect to any Conflict Circumstance arising in connection with any other agreement according to the terms of the partnership agreement that apply.

Nothing in the provisions described in this subsection shall require a Parent to make or cause a Partner Sub to either (1) cure or mitigate Equistar’s inability to make any payment or to perform or observe any terms and provisions under any other agreements, (2) cause Equistar to require from the Partner Subs any cash contributions in respect of any payment, performance or observance involving a Conflict Circumstance or (3) make any contribution to Equistar that the Partner Sub is not otherwise required to make under terms of the partnership agreement concerning required capital contributions. See “The Partnership Agreement—Transactions with Affiliates.”

Restrictions on Transfer of Partner Sub Stock

Without the consent of the other Parent, no Parent may transfer less than all of its interests in its Partner Subs (the “Partner Sub Stock”) except in compliance with the following provisions.

Each Parent may transfer all, but not less than all, of its Partner Sub Stock, without the consent of the other Parent, if the transfer is in connection with either (1) a merger, consolidation, conversion or share exchange of the transferring Parent or (2) a sale or other disposition of (A) the Partner Sub Stock, plus (B) other assets representing at least 50% of the book value of the transferring Parent’s assets excluding the Partner Sub Stock, as reflected on its most recent audited consolidated or combined financial statements.

In addition, any transfer of Partner Sub Stock by any Parent described above is only permitted if the acquiring, succeeding or surviving entity, if any, both (1) succeeds to and is substituted for the transferring Parent with the same effect as if it had been named in the parent agreement and (2) executes an instrument agreeing to be bound by the obligations of the transferring Parent under the parent agreement, with the same effect as if it had been named in the instrument.

The transferring Parent may be released from its guarantee obligations under the parent agreement after the successor parent agrees to be bound by the Parent’s obligations.

Unless a transfer is permitted under the provisions described above, any Parent desiring to transfer all of its Partner Sub Stock to any person, including another Parent or any affiliate of a Parent, may only transfer its Partner Sub Stock for cash consideration and will give a written right of first option to Equistar and the other Parent. The offeree Parent will have the option to elect to purchase all of the Partner Sub Stock of the selling Parent, on the terms described in the right of first offer. If the offeree Parent does not elect to purchase all of the selling Parent’s Partner Sub Stock within 45 days after the receipt of the initial notice, the selling Parent will have a further 180 days during which it may, subject to the provisions of the following paragraph, consummate the sale of its Partner Sub Stock to a third-party purchaser at a purchase price and on other terms that are no more favorable to the purchaser than the initial terms offered to the offeree Parent. If the sale is not completed within the further 180-day period, the right of first offer will be deemed to have expired and a new right of first offer shall be required before the selling Parent may make any transfer of its Partner Sub Stock.

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Before the selling Parent may consummate a transfer of its Partner Sub Stock to a third party under the provisions described in the preceding paragraph, the selling parent shall demonstrate to the other Parent that the proposed purchaser, or the person willing to serve as its guarantor as contemplated by the terms of the parent agreement, has outstanding indebtedness that is rated investment grade by either Moody’s or S&P. If such proposed purchaser or the other person has no rated indebtedness outstanding, that person shall provide an opinion from Moody’s, S&P or from a nationally recognized investment banking firm that it could be reasonably expected to obtain a suitable rating. Moreover, a Parent may transfer its Partner Sub Stock, under the previous paragraph, only if all of the following occur:

• the transfer is accomplished in a nonpublic offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations;

• the transfer does not cause a default under any material contract which has been approved unanimously by the Governance Committee and to which Equistar is a party or by which Equistar or any of its properties is bound;

• the transferee executes an appropriate agreement to be bound by the parent agreement;

• the transferor and/or transferee bears all reasonable costs incurred by Equistar in connection with the transfer;

• the transferee, or the guarantor of the obligations of the transferee, delivers an agreement to the other Parent and Equistar substantially in the form of the parent agreement; and

• the proposed transferor is not in default in the timely performance of any of its material obligations to Equistar.

In no event may any Parent transfer the Partner Sub Stock of any of the subsidiaries that hold the direct interests in Equistar to any person unless the transferring Parent simultaneously transfers the Partner Sub Stock of all of its subsidiaries that hold the direct interests in Equistar to that person or a wholly owned affiliate of that person or a common parent.

Competing Business by Owners of Equistar or Their Affiliates

If any of Lyondell, Millennium, Occidental Petroleum Corporation, Occidental Chemical Corporation, Oxy CH Corporation or Occidental Chemical Holding Corporation or any of their affiliates desires to initiate or pursue any opportunity to undertake, engage in, acquire or invest in a business opportunity of the type described under “The Partnership Agreement—Business Opportunities Which Must be Offered to Equistar,” it shall agree to offer that business opportunity to Equistar under the terms and conditions in the partnership agreement as if it were the “proposing partner,” as described in such section. Equistar will have the rights and obligations arising from the offer of the business opportunity granted by the partnership agreement. See “The Partnership Agreement—Business Opportunities Which Must be Offered to Equistar.”

Executive Officers

The Governance Committee has delegated responsibility for day-to-day operations to the executive officers of Equistar. The executive officers consist of a Chief Executive Officer and others as determined from time to time by the Governance Committee. Except for the Chief Executive Officer, the approval of at least two representatives of each of Lyondell and Millennium is required to appoint or discharge executive officers, based upon the recommendation of the Chief Executive Officer.

The Chief Executive Officer holds office for a five-year term, assuming he does not resign or die and is not removed, and need not be an employee of Equistar. Mr. Smith was re-appointed for a five-year term in January 2003. The Chief Executive Officer may be removed at any time by action of the Governance Committee. Lyondell has the right to designate Equistar’s Chief Executive Officer, provided the person designated is reasonably acceptable to Millennium.

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The following table sets forth the names and ages of the executive officers of Equistar as of March 1, 2004.

Name	Age	Partnership Position
Dan F. Smith	57	Chief Executive Officer
Morris Gelb	57	Chief Operating Officer
James W. Bayer	48	Senior Vice President, Manufacturing
Edward J. Dineen	49	Senior Vice President, Chemicals and Polymers
W. Norman Phillips, Jr.	49	Senior Vice President, Fuels and Raw Materials
John A. Hollinshead	54	Vice President, Human Resources

Mr. Smith has been Chief Executive Officer of Equistar since December 1997. Mr. Smith has been a director of Lyondell since October 1988. He has been President of Lyondell since August 1994 and Chief Executive Officer of Lyondell since December 1996. Mr. Smith was Chief Operating Officer of Lyondell from May 1993 to December 1996. Prior thereto, Mr. Smith held various senior executive positions with Lyondell and ARCO, including Executive Vice President and Chief Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for Lyondell and the Lyondell Division of ARCO. Mr. Smith is a director of Cooper Industries, Inc. and is a member of the Governance Committee of Equistar.

Mr. Gelb was appointed Chief Operating Officer of Equistar in March 2002. Mr. Gelb has served as Executive Vice President and Chief Operating Officer of Lyondell since December 1998. Previously, he served as Senior Vice President, Manufacturing, Process Development and Engineering of Lyondell from July 1998 to December 1998. He was named Vice President for Research and Engineering of ARCO Chemical Company in 1986 and Senior Vice President of ARCO Chemical Company in July 1997. Mr. Gelb also serves as a member of the Partnership Governance Committee of LCR.

Mr. Bayer was appointed Senior Vice President, Manufacturing of Equistar in September 2000. Mr. Bayer has served as Senior Vice President, Manufacturing of Lyondell since October 2000. He previously was the Vice President of Health, Safety, Environmental and Engineering of Lyondell. From December 1997 to July 1999 he was Director, Gulf Coast Manufacturing for ARCO Chemical Company. Prior to December 1997, Mr. Bayer served as Channelview Plant Manager for ARCO Chemical Company.

Mr. Dineen was appointed Senior Vice President, Chemicals and Polymers of Equistar in March 2002 and Senior Vice President, Chemicals and Polymers of Lyondell in May 2002. Prior thereto, he served as Senior Vice President, Intermediates and Performance Chemicals of Lyondell since May 2000. Prior to this position, he served as Senior Vice President, Urethanes and Performance Chemicals of Lyondell since July 1998. He served as Vice President, Performance Products and Development for ARCO Chemical Company beginning in June 1997, and served as Vice President, Planning and Control for ARCO Chemical European Operations from 1993 until his appointment as Vice President, Worldwide CoProducts and Raw Materials in 1995.

Mr. Phillips was appointed Senior Vice President, Fuels and Raw Materials of Equistar in March 2002 and Senior Vice President, Fuels and Raw Materials of Lyondell in May 2002. Prior thereto, he served as Senior Vice President, Polymers of Equistar since August 1998. He was previously Vice President, Petrochemicals of Equistar from December 1997 to August 1998. Mr. Phillips also has served as a Senior Vice President of Lyondell since October 2000. He previously served as Vice President, Polymers of Lyondell from January 1997 to December 1997, and as Vice President of Lyondell with responsibilities in the areas of marketing and operations from 1993 to January 1997. Mr. Phillips also serves as a member of the Partnership Governance Committee of LCR.

Mr. Hollinshead was appointed Vice President, Human Resources of Equistar in November 2000. Mr. Hollinshead has served as Vice President, Human Resources of Lyondell since July 1998. Prior to his appointment as Vice President, Human Resources of Lyondell, he was Director, Human Resources, Manufacturing and Engineering for Equistar and, until 1997, was Manager, Human Resources for Lyondell.

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Code of Ethics

Equistar has adopted a “code of ethics,” as defined in Item 406(b) of Regulation S-K. Equistar’s code of ethics, known as its Business Ethics and Conduct Policy, applies to all officers and employees of Equistar, including Equistar’s principal executive officer, principal financial officer, principal accounting officer and controller. Equistar has posted its Business Ethics and Conduct Policy on its website, www.equistarchem.com. In addition, Equistar intends to satisfy the disclosure requirements of Item 10 of Form 8-K regarding any amendment to, or waiver from, a provision of the Business Ethics and Conduct Policy that applies to Equistar’s principal executive officer, principal financial officer, principal accounting officer or controller and relates to any element of the definition of code of ethics set forth in Item 406(b) of Regulation S-K by posting such information on its website, www.equistarchem.com.

Item 11. Executive Compensation

Summary Compensation Table

The table below provides information regarding the compensation awarded to or earned by Equistar’s Chief Executive Officer and the next most highly compensated executive officer (collectively, the “named executive officers”) during the fiscal years ended December 31, 2003, 2002 and 2001. Messrs. Gelb, Bayer, Dineen and Hollinshead provide services to Equistar pursuant to a shared services arrangement, but are employed and compensated by Lyondell. Therefore, they are not considered for inclusion in the following table. See “Item 13. Certain Relationships and Related Transactions – Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.”

					Long-Term Compensation
		Annual Compensation			Awards		Payouts
Name and Principal Position	Year	Salary ($)	Bonus ($) (a)	Other Annual Compensation ($) (b)	Restricted Stock Awards ($) (c)	Securities Underlying Options (#) (d)	Long-term Incentive Payouts ($) (e)	All Other Compensation ($) (f)
Dan F. Smith (g) Chief Executive Officer	2003 2002 2001	—   —   —	—   —   —	—   —   —	—   —   —	—   —   —	—   —   —	—   —   —
W. Norman Phillips, Jr. Senior Vice President, Fuels and Raw Materials	2003 2002 2001	321,724 305,854 296,010	—   86,372 9,324	12,751 8,290 13,945	84,594 —   —	53,025 69,984 55,993	250,813 343,633 307,142	46,285 42,280 52,233

(a) Based on the formula used to calculate the bonus, as a result of Equistar’s results due to the prolonged adverse business conditions in the industry, no annual cash bonus was paid to Mr. Phillips with respect to 2003. The bonus amounts shown for Mr. Phillips for 2003 and 2002 were calculated based on the economic value of the entire Lyondell enterprise (including Equistar). The bonus amount shown for Mr. Phillips for 2001 was calculated solely with reference to Equistar.

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(b) Amounts for Mr. Phillips include imputed income in respect of Equistar’s Long-Term Disability Plan and tax gross-ups (the additional reimbursement paid to a recipient to cover the federal income tax obligations associated with the underlying benefit, including an additional amount based on maximum applicable income tax rates) in respect of financial counseling reimbursements, as set forth below:

Year	Imputed Income		Financial Counseling Tax Gross-Ups
2003	$	6,039	$	6,712
2002		4,870		3,420
2001		7,285		6,660

(c) The amount shown for 2003 represents 7,309 “restricted Equistar shares” awarded to Mr. Phillips under the Incentive Plan during 2003, as described under “Equistar’s Incentive Plan” below. The restricted Equistar shares give participants the right to receive a cash payment equal to the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. The awards vest in annual one-third increments, beginning February 7, 2004. At the time of vesting, each participant receives a cash payment equal to two times the value of the participant’s vested restricted Equistar shares. The valuation in the table of the 7,309 restricted Equistar shares granted to Mr. Phillips in February 2003 was calculated using the weighted composite market values of the common stock of Equistar’s owners on the date of grant, which was $11.574 per composite unit. The value of these unvested restricted Equistar shares at December 31, 2003, based on the weighted composite market values of the common stock of Equistar’s owners on December 31, 2003 of $15.24 per composite unit, was $111,389. Each participant with unvested restricted Equistar shares receives quarterly dividend equivalent payments in cash, the amount of which is determined by multiplying the quarterly cash dividend paid by each of the owner companies on their respective shares of common stock (weighted in accordance with the weighting factors set forth above) by the number of unvested restricted Equistar shares held by such participant at the time.

(d) The amount shown for 2003 represents “Equistar options” awarded under the Incentive Plan during 2003, as further described in the Option Grants in 2003 table below. Amounts shown for 2002 and 2001 represent Equistar options awarded under the Incentive Plan during 2002 and 2001, respectively. The Equistar options give participants the right to receive a cash payment equal to the increase in value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. When the 2001 and 2002 grants were initially made, Equistar was owned by Lyondell, Millennium and Occidental. The initial weighting factors set by the Compensation Committee for the 2001 and 2002 grants were: (1) Lyondell, 45%, (2) Millennium, 45%, and (3) Occidental, 10%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. In August 2002, Lyondell purchased Occidental’s interest in Equistar. As a result, the Compensation Committee revised the weighting factors and, based on the revised weighting factors, adjusted the size and exercise price of the 2001 and 2002 grants to reflect the new ownership of Equistar. The revised weighting factors are: (1) Lyondell, 60%, and (2) Millennium, 40%. The amounts shown for 2001 and 2002 reflect the Equistar options awarded during 2001 and 2002, respectively, as revised by the Compensation Committee to reflect the new ownership of Equistar. The amount shown for 2003 also reflects the new ownership of Equistar and the new weighting factors.

(e) Prior to 2001, awards were made to Mr. Phillips under Equistar’s previous bonus plan, known as the Equistar Bonus Plan, which awards entitle him to deferred cash payments made in three annual installments. See “Equistar’s Bonus Plan” below for a description of these awards. The amount shown for 2001 represents the initial one third of the amount earned with respect to 1999 and the second one third of the amount earned with respect to 1998. The amount shown for 2002 represents the initial one third of the amount earned with respect to 2000, the second one third of the amount earned with respect to 1999 and the final one third of the amount earned with respect to 1998. The amount shown for 2003 represents the second one third of the amount earned with respect to 2000 and the final one third of the amount earned with respect to 1999.

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(f) The amount shown for Mr. Phillips includes contributions to the Executive Supplementary Savings Plan, incremental executive medical plan premiums, financial counseling reimbursements and amounts in respect of the Executive Life Insurance Plan, as follows:

	Year	Mr. Phillips
Executive Supplementary Savings Plan	2003	$	19,303
Incremental Medical Plan Premiums	2003		14,744
Financial Counseling Reimbursement	2003		11,188
Executive Life Insurance Plan	2003		1,050

(g) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions—Agreement Regarding Services of Equistar’s Chief Executive Officer.”

Equistar’s Bonus Plan

Prior to 2001, Equistar provided performance-driven, annual and long-term incentive compensation to executive officers through the Equistar Bonus Plan. The Bonus Plan integrated current and deferred (or long-term) components. Awards were based on whether Equistar reached its performance and financial goals in critical areas, primarily economic value added. Economic value added was used to measure Equistar’s cash flow performance in excess of a capital charge, which was calculated by multiplying the capital invested in Equistar by Equistar’s weighted average cost of capital.

Awards consisted of a combination of annual (or current cash) and long-term (or deferred cash) compensation. The relative percentages of current cash and deferred cash components were based on the market value of the Bonus Plan participant’s position, with the percentage of deferred cash compensation increasing as compared with current cash compensation as the market value of the Bonus Plan participant’s position increased. The deferred cash portion of each award is paid out over three consecutive years, one-third each year, beginning approximately one year from the payment of the related annual cash component, and is reflected in the “Long-Term Incentive Payouts” column of the Summary Compensation Table. The payout amounts for the deferred compensation component could be adjusted upward, with no cap, or downward, with an 80% floor, based on Equistar’s ongoing results over the three-year period covered by the deferred cash component. The Bonus Plan remains in effect. However, in 2001, Equistar adopted a new Incentive Plan.

Equistar’s Incentive Plan

In 2001, Equistar adopted a new Incentive Plan and began granting incentive awards to executive officers under this Incentive Plan. Equistar believes that the grants of incentive awards under the Incentive Plan are comparable in value to grants of incentive awards in prior years. The 2001 and 2002 awards were made in three forms:

• Annual cash awards, which reward management for economic value added and financial and operational performance based on other measures selected by Equistar’s Compensation Committee.

• Equistar options, which give participants the right to receive a cash payment equal to the increase in the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The awards have a strike price equal to the weighted composite market value of the current owner companies, vest in annual one-third increments and generally have a term of ten years.

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• Equistar performance shares, which allow participants to receive a cash payment equal to the value of a number of units, which varies with the achievement of performance criteria. The value of each unit is determined by the composite market values of the common stock of Equistar’s current owners, weighted in proportions set by Equistar’s Compensation Committee. The cash payment actually made to participants will depend on the weighted composite total shareholder return for Equistar’s owners over a three-year period.

Beginning in 2003, Equistar’s Compensation Committee added a fourth type of award, known as restricted Equistar shares. Restricted Equistar shares give participants the right to receive a cash payment equal to the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The awards vest in annual one-third increments. At the time of vesting, the participant receives a cash payment equal to two times the value of the vested restricted Equistar shares. The awards are subject to forfeiture on employment termination other than for death, disability or retirement.

Equistar believes that the Incentive Plan allows Equistar’s Compensation Committee to make awards that provide appropriate performance and retention incentives to management.

Option Grants in 2003

	Individual Grants				Grant Date Present Value ($)
Name	No. of Securities Underlying Options Granted	% of Total Options Granted to Employees in 2003	Exercise Price ($/Unit)	Expiration Date
Mr. Smith (a)	—	—	—	—	—
Mr. Phillips (b)	53,025	7.58	11.70	2/7/13	166,499

(a) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions—Agreement Regarding Services of Equistar’s Chief Executive Officer.”

(b) The award to Mr. Phillips represents Equistar options granted by Equistar pursuant to the Incentive Plan. The Equistar options give participants the right to receive a cash payment equal to the increase in the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. The Equistar options have an exercise price equal to the weighted composite market value of the common stock of the owner companies on the grant date, and vest in one-third annual increments, with the first third vesting on February 7, 2004. The Equistar options are subject to early vesting under certain specified conditions. The grant date present value per unit of Equistar options granted was estimated using the Black-Scholes option-pricing model, on a three-year basis for each of Equistar’s owners, and based on certain assumptions for each of Equistar’s owners. The Black-Scholes values for the owner companies were then weighted in accordance with the weighting factors set forth above to estimate the grant date present value per unit of Equistar options. The following assumptions were used with respect Lyondell: fair value per share—$3.02; dividend yield—6.37%; expected volatility—42.16%; risk-free interest rate—4.23%; and maturity in years—10. The following assumptions were used with respect to Millennium: fair value per share—$3.33; dividend yield—4.12%; expected volatility—44.84%; risk-free interest rate—4.23%; and maturity in years—10.

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No Equistar options were exercised during 2003 by any named executive officers. The following table shows the number of composite units represented by outstanding Equistar options held by each of the named executive officers as of December 31, 2003, including the value of “in-the-money” Equistar options, which represents the positive spread between the exercise price of any such Equistar option and the year end weighted composite market value.

Option Values at December 31, 2003

	Number of Securities Underlying Unexercised Options at Fiscal Year-End (#)		Value of Unexercised In-The-Money Options at Fiscal Year-End ($)
Name	Exercisable	Unexercisable	Exercisable	Unexercisable
Mr. Smith (a)	—	—	—	—
Mr. Phillips (b)	60,654	118,348	41,450	270,615

(a) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions—Agreement Regarding Services of Equistar’s Chief Executive Officer.”

(b) Equistar options were awarded pursuant to the Incentive Plan. The awards have an exercise price equal to the composite market value on the date of grant of the common stock of Equistar’s owner companies, as weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. The composite market value of the common stock of Equistar’s owner companies on December 31, 2003, as weighted in proportions set by the Compensation Committee, was $15.24 per composite unit.

Long-Term Incentive Plans—Awards in 2003

Name	Number of Shares, Units or Other Rights (a)	Performance or Other Period Until Maturation Or Payout	Estimated Future Payouts under Non-Stock Price-Based Plans
			Threshold (#)	Target (#)	Maximum (#)
Mr. Smith (b)	—	—	—	—	—
Mr. Phillips (c)	28,462 units	1/1/03-12/31/05	5,692 units	28,462 units	56,924 units

(a) Amounts in this column are the payout “target” number of units. Up to two times this amount may pay out as the “maximum” payout described in this table.

(b) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions—Agreement Regarding Services of Equistar’s Chief Executive Officer.”

(c) The award granted to Mr. Phillips is a performance share award pursuant to the Incentive Plan. Equistar performance share awards allow participants to receive a cash payment equal to the value of a number of units, which varies with the achievement of performance criteria. The value of each unit is determined by the composite market value of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. Equistar performance share awards may only be paid in cash. The cash amount actually paid to participants will depend on the weighted composite total shareholder return for the owner companies over the 2003-2005 performance cycle. The performance target is to achieve total shareholder return (defined as the change in composite fair market value of a unit plus composite dividend yield

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measured over the course of the performance cycle) during the performance cycle of at least the fiftieth percentile, as compared to the companies in the peer group. In order for any performance shares to be earned, a total shareholder return ranking of at least the thirtieth percentile (the threshold amount) must be achieved; and total shareholder return in the eightieth percentile will result in the maximum payment set forth above. Shareholder returns between the thirtieth and fiftieth percentile, or between the fiftieth and eightieth percentile will be interpolated between the values listed above. The companies composing the peer group are all chemical or specialty chemical companies.

Pension Benefits

The following table shows estimated annual pension benefits payable to Equistar’s employees, including the named executive officers (other than Mr. Smith, who does not receive any compensation from Equistar), upon retirement at age 65 based on credited service as of January 1, 2004, under the provisions of the Equistar Retirement Plan and the Equistar Supplementary Executive Retirement Plan (together, the “Equistar Retirement Plan”).

Pension Plan Table

Average Final Earnings (Base Salary plus Annual Bonus) Highest Three Consecutive Years out of Last 10 Years	Approximate Annual Benefit for Years of Membership Service Indicated (a)
	15 Years		20 Years		25 Years		30 Years		35 Years
$1,200,000	$	261,000	$	348,000	$	435,000	$	522,000	$	609,000
1,100,000		239,250		319,000		398,750		478,500		558,250
1,000,000		217,500		290,000		362,500		435,000		507,500
900,000		195,750		261,000		326,250		391,500		456,750
800,000		174,000		232,000		290,000		348,000		406,000
700,000		152,250		203,000		253,750		304,500		355,250
600,000		130,500		174,000		217,500		261,000		304,500
500,000		108,750		145,000		181,250		217,500		253,750
400,000		87,000		116,000		145,000		174,000		203,000
300,000		65,250		87,000		108,750		130,500		152,250
200,000		43,500		58,000		72,500		87,000		101,500

(a) As of December 31, 2003, Mr. Phillips had six years of credited service (rounded to the nearest whole number) under the Equistar Retirement Plan.

The amounts shown in the above table are necessarily based upon certain assumptions, including retirement of the employee at age 65, based on credited services as of January 1, 2004, and payment of the benefit under the basic form of allowance provided under the Equistar Retirement Plan (payment for the life of the employee only). The amounts will change if the payment is made under any other form of allowance permitted by the respective retirement plan, or if an employee’s actual retirement occurred after January 1, 2004, since the “annual covered compensation level” of such employee (one of the factors used in computing the annual retirement benefits) may change during the employee’s subsequent years of membership service. The covered compensation for which retirement benefits are computed under the Equistar Retirement Plan is the average of the participant’s highest three consecutive years out of the last ten years of base salary plus annual bonus. Base salary and annual bonus amounts are set forth under the “Salary” and “Bonus” headings in the Summary Compensation Table. The benefits shown are not subject to deduction for Social Security benefits or other offset amounts.

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Executive Severance Arrangements and Change in Control

The Lyondell Chemical Company Executive Severance Pay Plan (the “Severance Plan”) generally applies to all executive officers of Lyondell, including Mr. Smith, and certain other key members of management that are designated by the Chief Executive Officer of Lyondell. The Severance Plan also covers executive officers and other key members of management (as designated by the Chief Executive Officer of Lyondell) of Lyondell’s subsidiaries and Equistar. The Severance Plan provides for the payment of certain benefits to covered employees upon certain terminations following a Change in Control of Lyondell. Under the Severance Plan, a “Change in Control” of Lyondell means any one of the following events:

• the incumbent directors of Lyondell (directors as of February 1, 1999 or individuals recommended or approved by a majority of the then incumbent directors other than as a result of either an actual or threatened election contest) cease to constitute at least a majority of Lyondell’s Board of Directors,

• the shareholders of Lyondell approve a merger, consolidation, or recapitalization of Lyondell, or a sale of substantially all Lyondell’s assets, unless immediately after the consummation of the transaction, the shareholders of Lyondell immediately prior to the transaction would own 80% or more of the then outstanding equity interests and combined voting power of the then outstanding voting securities of the resulting entity, and the incumbent directors at the time of initial approval of the transaction would, immediately after the transaction, constitute a majority of the Board of Directors or similar managing group of such resulting entity,

• the shareholders of Lyondell approve any plan for the liquidation or dissolution of Lyondell,

• any person shall become the beneficial owner of more than 20% of the outstanding common stock of Lyondell or combined voting power of all voting securities of Lyondell, unless such person exceeds 20% ownership solely as a result of (A) Lyondell acquiring securities and correspondingly reducing the number of shares or other voting securities outstanding, (B) an acquisition of securities directly from Lyondell except for any conversion of a security that was not acquired directly from Lyondell or (C) a direct or indirect acquisition by Occidental or Millennium (or an affiliate) of beneficial ownership of securities representing (x) in the case of Occidental and its affiliates, no more than 40%, (y) in the case of Millennium and its affiliates, no more than 40%, and (z) in the case of Occidental and Millennium and their respective affiliates in the aggregate, no more than 49% of either the then outstanding common stock or combined voting power of the then outstanding voting securities of Lyondell, as contemplated by any agreement between Lyondell and Occidental and/or Millennium or their affiliates where, as a result of the transaction or series of related transactions, Lyondell or the resulting entity owns a greater percentage equity interest in Equistar than Lyondell owned immediately prior to the transactions. If a person referred to in either (A) or (B) of this clause shall thereafter become the beneficial owner of additional shares of Lyondell’s common stock or other ownership interests representing 1% or more of the outstanding shares of Lyondell’s common stock or 1% or more of the combined voting power of Lyondell (other than by stock split, stock dividend or similar transaction or as a result of an event described in (A), (B) or (C) of this clause), then a Change in Control will be deemed to have occurred.

A Change in Control will not be deemed to occur under the second bullet of the paragraph above if each of the following conditions is met: (1) the transaction is between Lyondell and/or its affiliates and Millennium and/or its affiliates, (2) Lyondell or an entity that was a wholly owned subsidiary of Lyondell prior to the transaction has a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, immediately after the transaction, (3) Millennium or an entity that was a wholly owned subsidiary of Millennium prior to the transaction has a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, immediately after the transaction, and (4) as a result of the transaction, Lyondell or its affiliates own a greater percentage equity interest in Equistar than Lyondell owned immediately prior to the transaction.

If an employee covered under the Severance Plan is terminated by his or her employer without cause or by the employee for good reason (which includes certain “constructive” terminations) within two years following a Change in Control, the employee will be entitled to receive from Lyondell a payment equal to one times to three times

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annual earnings, depending on the employee’s position with his or her employer. Annual earnings for this purpose is generally the sum of an employee’s base pay plus target annual bonus. Mr. Smith would receive from Lyondell a payment equal to three times his annual earnings. Mr. Phillips would receive from Lyondell a payment equal to two times his annual earnings. Outstanding Lyondell option awards, if any, to covered employees will be automatically vested. Covered employees will also receive, at Lyondell’s expense: (1) eligibility to commence vested early retirement benefits under Lyondell’s or a subsidiary’s retirement plans, actuarially reduced for early commencement, and retiree medical coverage; (2) continuation of welfare benefit coverages for a period of two years following termination; and (3) outplacement services for a period of one year, at a cost not to exceed $40,000. In addition, covered employees will receive from Lyondell a gross-up payment for the amount of the excise tax liability, if any, imposed pursuant to Code Section 4999 with respect to any benefits paid in connection with the Change in Control. In order to receive benefits under the Severance Plan, a covered employee must sign a general release of claims against Lyondell and its affiliates. Upon a Change in Control, if applicable, Lyondell will also deposit into its Supplemental Executive Benefit Plans Trust any additional assets necessary to fully fund the benefits due under its Supplementary Executive Retirement Plan and Executive Deferral Plan. The Severance Plan may be amended or terminated at any time prior to a Change in Control or, if earlier, prior to the date that a third party submits a proposal to the Board of Directors that is reasonably calculated, in the judgment of Lyondell’s compensation committee, to effect a Change in Control. The Severance Plan may not be amended to deprive a covered employee of benefits after a Change in Control.

Compensation of Partnership Governance Committee Members

Members of the Governance Committee do not receive any compensation from Equistar for their service.

Compensation Committee Interlocks and Insider Participation

The members of Equistar’s Compensation Committee are John A. Hollinshead and John E. Lushefski. Mr. Smith, Equistar’s Chief Executive Officer, is also President, Chief Executive Officer and a director of Lyondell. Mr. Hollinshead, Vice President, Human Resources of Lyondell and Equistar, is an executive officer of Lyondell and Equistar. Mr. Lushefski, Senior Vice President and Chief Financial Officer of Millennium, is an executive officer of Millennium. Mr. Smith does not receive any compensation from Equistar for his services. Mr. Smith’s compensation is determined by Lyondell’s Compensation Committee. Accordingly, neither the Governance Committee nor the Compensation Committee of Equistar determines Mr. Smith’s compensation.

Lyondell, Millennium and other parties related to Lyondell and Millennium have various agreements and transactions with Equistar. For a description of these agreements and transactions, see “Item 13. Certain Relationships and Related Transactions.”

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Item 12. Security Ownership of Certain Beneficial Owners and Management

Equistar is wholly owned by subsidiaries of Lyondell and Millennium. Lyondell’s subsidiaries own 70.5% of Equistar’s equity and Millennium’s subsidiaries own 29.5%. Lyondell’s interest increased from 41% to 70.5% on August 22, 2002 when it acquired the equity of entities that were previously subsidiaries of Occidental. Lyondell and Millennium each file reports and other information with the SEC, and you may read and copy any document filed by Lyondell or Millennium at the SEC’s public reference room or on the SEC’s website located at www.sec.gov. Information Lyondell and Millennium file with the SEC is not incorporated by reference into this Annual Report and does not constitute a part of this Annual Report. The following information is given with respect to the owners’ interests in Equistar as of March 1, 2004.

Name and Address of Beneficial Owner	Nature of Beneficial Ownership	Percentage Partnership Interest
Lyondell Petrochemical L.P. Inc. Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	21.617	%
Lyondell (Pelican) Petrochemical L.P.1, Inc. Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	6.623	%
Lyondell (Pelican) Petrochemical L.P.2, Inc. Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	11.439	%
Lyondell LP3 Partners, LP Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	30.000	%
Millennium Petrochemicals LP LLC 230 Half Mile Road Red Bank, NJ 07701	Limited Partner	28.910	%
Lyondell Petrochemical G.P. Inc. 1221 McKinney Street, Suite 700 Houston, TX 77010	General Partner	0.821	%
Millennium Petrochemicals GP LLC 230 Half Mile Road Red Bank, NJ 07701	General Partner	0.590	%

Lyondell directly or indirectly owns 100% of the outstanding capital stock of each of Lyondell Petrochemical L.P. Inc., Lyondell (Pelican) Petrochemical L.P.1, Inc., Lyondell (Pelican) Petrochemical L.P.2, Inc., Lyondell LP3 Partners, LP and Lyondell Petrochemical G.P. Inc. (collectively, the “Lyondell Owner Subsidiaries”). Lyondell has pledged its interests in each of the Lyondell Owner Subsidiaries under its bank credit facility. Millennium indirectly owns 100% of the outstanding equity interests of each of Millennium Petrochemicals LP LLC and Millennium Petrochemicals GP LLC (collectively, the “Millennium Owner Subsidiaries”). Millennium has pledged its interest in each of the Millennium Owner Subsidiaries under its bank credit facility. None of the general partners holds any significant assets other than its partnership interest.

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Lyondell

Lyondell is a global chemical company. Lyondell had revenues of approximately $3.8 billion for the year ended December 31, 2003, and approximately $7.6 billion of assets at December 31, 2003. Lyondell is vertically integrated into its key raw materials through its equity ownership in Equistar. Lyondell operates in the following businesses:

• Intermediate Chemicals and Derivatives. Lyondell is a leading producer of propylene oxide, commonly referred to as PO, and a leading worldwide producer and marketer of PO derivatives. Lyondell also is a leading supplier of toluene diisocyanate and a major producer and marketer of styrene monomer and tertiary butyl alcohol, co-products of Lyondell’s proprietary PO technology.

• Petrochemicals and Polymers. Lyondell operates in these businesses through its ownership interest in Equistar.

• Refining. Lyondell owns 58.75% of LCR, which owns one of the largest crude oil refineries in the United States processing heavy Venezuelan crude oil. The refinery is located in Houston, Texas and is a full conversion refinery with heavy crude oil processing capability of approximately 268,000 barrels per day of 17 degree API gravity crude oil.

Millennium

Millennium is a major international chemical company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals. Millennium had revenues of approximately $1.7 billion for the year ended December 31, 2003, and approximately $2.4 billion of assets at December 31, 2003. In addition to its interest in Equistar, Millennium operates in three business segments: Titanium Dioxide and Related Products; Acetyls; and Specialty Chemicals.

Millennium has leading market positions in the United States and the world:

• Through its Titanium Dioxide and Related Products business segment, Millennium is the second-largest producer of titanium dioxide in the world. Millennium is also the largest merchant seller of titanium tetrachloride and a major producer of zirconia, silica gel and cadmium-based pigments;

• Through its Acetyls business segment, Millennium is the second-largest producer of vinyl acetate monomer and acetic acid in North America;

• Through its Specialty Chemicals business segment, Millennium is a leading producer of terpene-based fragrance and flavor chemicals;

• Through its 29.5% interest in Equistar, Millennium is a partner in the second-largest producer of ethylene and the third-largest producer of polyethylene in North America, and a leading producer of performance polymers, oxygenated chemicals, aromatics and specialty petrochemicals.

Item 13. Certain Relationships and Related Transactions

Until August 2002, Equistar, a limited partnership, was wholly owned by subsidiaries of each of Lyondell, Millennium and Occidental. On August 22, 2002, Lyondell purchased Occidental’s 29.5% ownership interest in Equistar by purchasing all of the outstanding stock of the Occidental subsidiaries that were owners of Equistar. As a result, Occidental no longer owns an interest in Equistar and Lyondell’s ownership interest in Equistar increased from 41% to 70.5%. Millennium owns the remaining 29.5% interest in Equistar. Based on the most recent Statement on Schedule 13G or 13D, Form 5 or amendments thereto filed with the Securities and Exchange Commission, as of March 1, 2004, Occidental beneficially owned 2,700,000 shares of Lyondell’s original common stock, 36,823,421 shares of Lyondell’s Series B common stock and warrants to purchase five million shares of

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Lyondell’s original common stock, representing in the aggregate approximately 25% of all of Lyondell’s outstanding common stock. In addition, two Occidental executives, Dr. Ray R. Irani, Chairman and Chief Executive Officer, and Stephen I. Chazen, Chief Financial Officer and Executive Vice President, serve as members of Lyondell’s Board of Directors.

The following summary describes transactions among Equistar and its current owners and their affiliates. In addition, as a result of Occidental’s beneficial ownership interest in Lyondell and its representation on Lyondell’s Board of Directors, the following summary also describes transactions among Equistar and Occidental and its affiliates. Equistar believes that the related party transactions described below were obtained on terms substantially no more or less favorable than those that would have been agreed upon by third parties on an arm’s length basis.

Asset Contributions by Lyondell and Affiliates of Millennium and Occidental

Both Lyondell and Millennium Petrochemicals entered into separate asset contribution agreements on December 1, 1997, providing for the contribution of the Lyondell and Millennium contributed businesses. Wholly owned subsidiaries of Occidental (the “Occidental Subsidiaries”) entered into an asset contribution agreement with Equistar on May 15, 1998, with respect to the transfer of the Occidental contributed business, a portion of which transfer was accomplished through a merger of an Occidental Subsidiary with and into Equistar. Among other things, the asset contribution agreements required representations and warranties by the contributor regarding the transferred assets and indemnification of Equistar by the contributor. These agreements also provide for the assumption by Equistar of, among other things:

• third-party claims that are related to contingent liabilities arising prior to the contribution transactions that are filed before December 1, 2004 as to Lyondell and Millennium Petrochemicals, or before May 15, 2005 as to the Occidental Subsidiaries, to the extent the aggregate amount does not exceed, in the case of each of Lyondell, Millennium and the Occidental Subsidiaries, $7 million;

• third-party claims related to contingent liabilities arising prior to the contribution transactions that are filed for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, or after May 15, 2005 as to the Occidental Subsidiaries;

• obligations for $745 million of Lyondell indebtedness, of which $301 million remains outstanding as of December 31, 2003;

• a $750 million intercompany obligation of Millennium Petrochemicals to an indirect subsidiary of Millennium, which has been repaid;

• the lease intended for security relating to the Corpus Christi facility contributed by Occidental, which has been repaid;

• liabilities for products sold after December 1, 1997 as to Lyondell and Millennium Petrochemicals, or after May 15, 1998 as to the Occidental Subsidiaries, regardless of when manufactured;

• certain post-retirement benefits related to the applicable contributed business or to certain Lyondell employees who became employees of Equistar;

• in the case of the Millennium Petrochemicals asset contribution agreement, future maintenance and maintenance turnaround costs related to the Millennium contributed business;

• in the case of each of the Millennium Petrochemicals and the Occidental Subsidiaries asset contribution agreements, obligations under railcar leases under which Equistar is the lessee.

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As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries amended these asset contribution agreements to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. Equistar believes that these amendments do not materially change the asset contribution agreements.

Lyondell, Millennium Petrochemicals and Occidental Chemical Corporation, a subsidiary of Occidental (“Occidental Chemical”), entered into Master Intellectual Property Agreements and other related agreements with respect to intellectual property with Equistar. These agreements provide for all of the following:

• the transfer of intellectual property of Lyondell, Millennium Petrochemicals and Occidental Chemical related to the businesses each contributed to Equistar;

• the grant of irrevocable, non-exclusive, royalty-free licenses to Equistar (without the right to sublicense) with respect to intellectual property retained by Lyondell, Millennium Petrochemicals or Occidental Chemical that is related to Equistar’s business; and

• the grant of irrevocable, non-exclusive, royalty-free licenses (without the right to sublicense) from Equistar to Lyondell, Millennium Petrochemicals and Occidental Chemical with respect to intellectual property each contributed to Equistar.

Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each entered into various other conveyance documents with Equistar to effect their asset contributions as provided for in their respective contribution agreements.

Transactions with LMC

Equistar provides operating and other services for LMC (which is wholly owned by Lyondell) under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to LMC by Equistar of the real property on which LMC’s methanol plant is located. Under the terms of those agreements, LMC paid Equistar a management fee of approximately $7 million in 2003 and reimbursed certain expenses of Equistar at cost. The natural gas for LMC’s plant is purchased by Equistar as agent for LMC under Equistar master agreements with various third party suppliers, which master agreements are administered by Lyondell personnel. These sales of natural gas to LMC were approximately $98 million in 2003.

Transactions with LCR

In connection with the formation of Equistar, substantially all of Lyondell’s rights and obligations under the terms of its product sales and raw material purchase agreements with LCR were assigned to Equistar. Accordingly, refinery products, including propane, butane, naphthas, heating oils and gas oils, are sold by LCR to Equistar as raw materials, and some olefins by-products are sold by Equistar to LCR for processing into gasoline. LCR billed Equistar approximately $227 million in 2003 in connection with these product sales and Equistar billed LCR approximately $447 million in 2003 in connection with these raw material purchases.

Equistar and LCR are also parties to:

• tolling arrangements under which some of LCR’s co-products are transferred to Equistar and processed by Equistar, with the resulting product being returned to LCR,

• terminaling and storage obligations,

• an arrangement under which LCR performs some marine chartering services, and

• an arrangement under which Equistar performs some marketing services for LCR.

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Equistar billed LCR approximately $23 million under these agreements in 2003 and LCR billed Equistar approximately $300,000 under these agreements in 2003. All of the agreements between LCR and Equistar are on terms generally representative of prevailing market prices.

Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental

Lyondell and Equistar have an agreement to share office space and utilize shared services over a broad range, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering and research and development, facility services, legal, accounting, treasury, internal audit, and tax (the “Shared Services Agreement”). Employee-related and indirect costs are allocated between the two companies in the manner prescribed in the Shared Services Agreement while direct third party costs, incurred exclusively for either Lyondell or Equistar, are charged directly to that entity. In addition, Lyondell and Equistar have an agreement for Lyondell to provide sales services for Equistar outside of North America for EO derivatives (the “International Sales Services Agreement”). During 2003, Lyondell charged Equistar approximately $152 million collectively for services provided under the Shared Services Agreement and the International Sales Services Agreement. During 2003, Equistar charged Lyondell approximately $11 million for the shared services, research and development services and barge and dock usage and related services that it provided to Lyondell under the Shared Services Agreement.

Equistar and Millennium Petrochemicals are parties to a variety of operating, manufacturing and technical service agreements. Agreements currently in effect include the provision by Equistar to Millennium Petrochemicals of utilities and fuel streams. These agreements also include the provision by Millennium Petrochemicals to Equistar of operational services, including utilities as well as barge dock access and related services. As a consequence of services provided by Equistar to Millennium Petrochemicals, Equistar billed Millennium Petrochemicals approximately $8 million in 2003. As a consequence of services provided by Millennium Petrochemicals to Equistar, Millennium Petrochemicals billed Equistar approximately $15 million in 2003. In the case of services and utilities, prices usually are based on cost recovery or an allocation of costs according to anticipated relative usage. In the case of product sales, prices generally are market-related. These agreements are expected to continue on terms similar to those described above.

Equistar also purchases vinyl acetate monomer and glacial acetic acid from Millennium Petrochemicals pursuant to agreements with Millennium Petrochemicals. Under the vinyl acetate monomer agreement, Equistar is required to purchase 100% of its vinyl acetate monomer raw materials requirements for its LaPorte, Texas; Clinton, Iowa; and Morris, Illinois plants for the production of ethylene vinyl acetate products at those locations. The initial term of the vinyl acetate monomer agreement expired December 31, 2000. The agreement automatically renewed annually, subject to termination by either party on one year’s notice. Equistar has provided notice to Millennium Petrochemicals to terminate the vinyl acetate monomer agreement, effective December 31, 2004. Equistar also has provided notice to Millennium Petrochemicals to terminate the glacial acetic acid agreement, effective December 31, 2004. During 2003, Equistar purchased an aggregate of approximately $10 million of vinyl acetate monomer and glacial acetic acid from Millennium Petrochemicals under these agreements.

Equistar subleases certain railcars from Occidental Chemical, for which Occidental Chemical charged Equistar approximately $7 million in 2003. In addition, Equistar leased its Lake Charles facility and the land related thereto from Occidental Chemical for $100,000 per year under a lease that expired in May 2003. At that time, Equistar entered into a new, one-year lease with Occidental Chemical that has renewal provisions for two additional one-year periods at either party’s option. Under the new lease, Equistar pays Occidental Chemical rent in an amount equal to $100,000 per year if Equistar is operating the facility or $60,000 per year if Equistar is not operating the facility. The Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions.

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Product Transactions with Occidental Chemical

Equistar and Occidental Chemical entered into an ethylene sales agreement dated effective May 15, 1998. Under the terms of this agreement, Occidental Chemical agreed to purchase an amount of ethylene from Equistar equal to 100% of the ethylene raw material requirements of Occidental Chemical’s U.S. plants, other than its LaPorte, Texas plant. The ethylene raw material is exclusively for internal use in production at these plants less a specified quantity per year tolled according to the provisions of the agreement. Either party has the option to “phase down” volumes over a period time. However, a “phase down” cannot begin until January 1, 2009 and the annual minimum requirements set forth in the agreement cannot decline to zero prior to December 31, 2013, unless specified force majeure events occur. The ethylene sales agreement provides for sales of ethylene at market-related prices. In addition to sales of ethylene under the agreement described above, from time to time Equistar has made sales of methanol, ethers and glycols to Occidental Chemical. During 2003, Occidental Chemical paid Equistar an aggregate of approximately $448 million for product purchases.

Also, from time to time, Equistar has entered into over-the-counter derivatives, primarily price swap contracts, related to crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental Chemical, to help manage its exposure to commodity price risk with respect to crude oil-related raw material purchases. During 2003, Equistar and Occidental Energy Marketing, Inc. settled approximately $300,000 of price swap contracts. There were no outstanding price swap contracts as of December 31, 2003. Equistar purchased various other products from Occidental Chemical at market-related prices totaling approximately $900,000 in 2003.

Ethylene Sales Agreement with Millennium Petrochemicals

Equistar sells ethylene to Millennium Petrochemicals at market-related prices under an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium Petrochemicals is required to purchase 100% of its ethylene requirements for its La Porte, Texas facility from Equistar. The pricing terms under this agreement between Equistar and Millennium Petrochemicals are similar to the pricing terms under the ethylene sales agreement between Equistar and Occidental Chemical. The initial term of this agreement expired December 31, 2000. The agreement automatically renews annually, subject to termination by either party on one year’s notice. Neither party has provided notice of termination of the agreement. Millennium Petrochemicals paid approximately $46 million to Equistar for ethylene during 2003.

Product Transactions with Lyondell

Equistar sells ethylene, propylene and benzene to Lyondell at market-related prices pursuant to agreements dated effective as of October 1998, August 1999 and January 1999, respectively. Under the agreements, Lyondell is required to purchase 100% of its benzene, ethylene and propylene requirements for its Channelview and Bayport, Texas facilities, with the exception of quantities of one product that Lyondell is obligated to purchase under a supply agreement with an unrelated third party entered into prior to 1999 and expiring in 2015. The pricing terms under the agreements between Equistar and Lyondell are similar to the pricing terms under the ethylene sales agreement between Equistar and Occidental Chemical. The initial term of each of those agreements between Equistar and Lyondell expires on December 31, 2013 in the case of the ethylene sales agreement, and December 31, 2014 in the case of the propylene and benzene sales agreements. After the initial term, each of the agreements automatically renews for successive one-year periods and either party may terminate any of the agreements on one year’s notice. In addition, a wholly owned subsidiary of Lyondell licenses MTBE technology to Equistar. Lyondell also purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices. Product sales from Equistar to Lyondell in 2003 were approximately $610 million. Equistar also purchases by-products from Lyondell at market-related prices. Product sales from Lyondell to Equistar in 2003 were approximately $5 million.

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Product Transactions with Oxy Vinyls, LP

During 2003, Equistar sold ethylene to Oxy Vinyls, LP (“Oxy Vinyls”), a joint venture partnership between Occidental Chemical and an unaffiliated third party, for Oxy Vinyls’ LaPorte, Texas facility at market-related prices pursuant to an agreement that expired on December 31, 2003. Equistar made ethylene sales to Oxy Vinyls totaling approximately $55 million in 2003.

Agreement Regarding Services of Equistar’s Chief Executive Officer

Dan F. Smith serves as the Chief Executive Officer of both Lyondell and Equistar and is a director of Lyondell. Mr. Smith receives no compensation from Equistar. Under an agreement between Equistar and Lyondell, Equistar paid $1,415,244 to Lyondell as compensation for the services rendered by Mr. Smith as part of the shared services provided by Lyondell during 2003. See “Item 11. Executive Compensation.”

Indemnity Agreement with Millennium America

Effective August 22, 2002 and in connection with Lyondell’s purchase of Occidental’s interest in Equistar, an indemnity agreement between Equistar and Millennium America was terminated. Millennium America (or its affiliate) may, in its sole discretion, elect to execute another indemnity agreement in favor of Equistar whereby Millennium America (or its affiliate) may be required to contribute to Equistar an amount equal to up to $300 million of any indebtedness for borrowed money that Millennium America elects at the time the indemnity agreement is executed. The existence of the indemnity would not prevent Equistar from repaying the indemnified amount at any time, and would not create any right in any lender or holder of outstanding notes or any person other than Equistar and its owners.

Debt Instruments of Lyondell Assumed by Equistar

Upon its formation, Equistar assumed $745 million of Lyondell indebtedness, of which $301 million remained outstanding as of December 31, 2003. Lyondell was not released as an obligor at the time of the assumption and, until November 2000, Lyondell remained as a co-obligor on the indebtedness, although as between Equistar and Lyondell, Equistar was primarily liable. In November 2000, Lyondell was added as a guarantor on $400 million of the indebtedness and subsequently the consent of the holders of the indebtedness was obtained to the release of Lyondell as a primary obligor (but not as a guarantor) on such $400 million of indebtedness, of which $300 million remained outstanding at December 31, 2003. Lyondell remains a co-obligor on the remaining $1 million of indebtedness, which matures in March 2005.

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Item 14. Principal Accountant Fees and Services

Audit and Non-Audit Fees

The following table presents fees for audit services rendered by PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) for the audit of Equistar’s annual financial statements for the years ended December 31, 2002 and December 31, 2003, and fees billed for audit-related, tax and all other services rendered by PricewaterhouseCoopers during those periods. Certain amounts for 2002 have been reclassified to conform to the 2003 presentation, in accordance with SEC rules enacted during 2003.

Thousands of dollars	2002		2003
Audit fees (a)	$	457	$	724
Audit-related fees (b)		38		32
Tax fees (c)		—		248
All other fees (d)		—		—
Total	$	495	$	1,004

(a) Audit fees consist of the aggregate fees billed for professional services rendered by PricewaterhouseCoopers for the audit of Equistar’s annual financial statements, the review of financial statements included in Equistar’s Form 10-Qs or for services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. Amounts include fees for the 2001 audit of the annual financial statements paid in 2002 of $78,000 and fees for the 2002 audit of the annual financial statements paid in 2003 of $185,000.

(b) Audit-related fees consist of the aggregate fees billed for assurance and related services by PricewaterhouseCoopers that are reasonably related to the performance of the audit or review of Equistar’s financial statements. This category includes fees related to: the performance of audits of Equistar’s benefit plans; agreed-upon or expanded audit procedures relating to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and consultations as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by regulatory or standard setting bodies.

(c) Tax fees consist of the aggregate fees billed for professional services rendered by PricewaterhouseCoopers for state sales and use tax compliance.

(d) All other fees consist of the aggregate fees billed for products and services provided by PricewaterhouseCoopers, other than the services described in notes (a) through (c) above.

Pre-Approval Policy

The Governance Committee serves as Equistar’s Audit Committee, and is directly responsible for appointing, setting compensation and overseeing the work of the independent auditors. In 2003, the Governance Committee established a policy requiring the Governance Committee to pre-approve all audit and non-audit services to be performed for Equistar by the independent auditors (including affiliates or related member firms) to ensure that the provision of such services does not impair the auditors’ independence.

A centralized service request procedure is used for all requests for the independent auditors to provide services to Equistar. Under this procedure, all requests for the independent auditors to provide services to Equistar initially are submitted to Equistar’s Vice President and Controller. Each such request must include a detailed description of the services to be rendered. If the proposed services have not already been pre-approved by the Governance Committee, the Vice President and Controller will submit the request and a detailed description of the proposed services to the Governance Committee. Requests to provide services that require pre-approval by the Governance Committee also must include a statement as to whether, in the Vice President and Controller’s view, the request is consistent with the SEC’s rules on auditor independence.

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The Governance Committee has designated Equistar’s Vice President and Controller to monitor the performance of all services provided by the independent auditors and to review compliance with the pre-approval policy. The Vice President and Controller will report to the Governance Committee periodically on the results of the monitoring.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following exhibits are filed as a part of this report:

Exhibit No.	Description
3.1	Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 17, 1997 (1)
3.1(a)	Certificate of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of May 15, 1998 (1)
3.1(b)	Certificate of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 31, 2002 (8)
3.2	Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP dated as of November 6, 2002 (7)
4.1	Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, dated as of January 15, 1999 (1)
4.1(a)	Form of First Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, Trustee (1)
4.1(b)	Form of Note (attached as Exhibit A to the Form of First Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, Trustee, filed herewith as Exhibit 4.1(a)) (1)
4.1(c)	Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (1)
4.1(d)	Form of Note (attached as Exhibit A to the Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.1(c)) (1)
4.2	Credit Agreement dated as of December 17, 2003 among Equistar Chemicals, LP, the subsidiaries of Equistar Chemicals, LP party thereto, the lenders party thereto and Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Bank of America, N.A. and Citicorp USA, Inc. as Co-Collateral Agents, and Citicorp USA, Inc. as Administrative Agent (11)
4.3	Indenture between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, dated as of March 10, 1992 (1)
4.3(a)	First Supplemental Indenture dated as of March 10, 1992, between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, to the Indenture dated as of March 10, 1992 (1)
4.3(b)	Second Supplemental Indenture dated as of December 1, 1997, among Lyondell Petrochemical Company, Equistar Chemicals, LP and First Trust National Association, Trustee, to the Indenture dated as of March 10, 1992 (1)
4.3(c)	Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee, to the Indenture dated as of March 10, 1992 (3)
4.3(d)	Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee, to the Indenture dated as of March 10, 1992 (3)
4.4	Indenture between Lyondell Petrochemical Company and Texas Commerce Bank National Association, as Trustee, dated as of January 29, 1996 (1)
4.4(a)	First Supplemental Indenture dated as of February 15, 1996, between Lyondell Petrochemical Company and Texas Commerce Bank National Association, Trustee, to the Indenture dated as of January 29, 1996 (1)

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4.4(b)	Second Supplemental Indenture dated as of December 1, 1997, among Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas Commerce Bank National Association, Trustee, to the Indenture dated as of January 29, 1996 (1)
4.4(c)	Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.4(d)	Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.5	Indenture dated as of August 24, 2001 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (2)
4.5(a)	Form of Note dated as of August 24, 2001 (attached as Exhibit A to the Indenture dated as of August 24, 2001 among Equistar Chemical, LP, Equistar Funding and The Bank of New York, as Trustee, filed herewith as Exhibit 4.5) (2)
4.6	Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (9)
4.6(a)	Form of Note dated as of April 22, 2003 (attached as Exhibit A to the Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.6) (9)
4.6(b)	First Supplemental Indenture dated as of November 21, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, to the Indenture dated as of April 22, 2003 (10)
4.7	Security Agreement dated as of December 17, 2003 among Equistar Chemicals, LP, the other borrowers and guarantors party thereto, and Citicorp USA, Inc. as Administrative Agent (11)
4.8	Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, Equistar Chemicals, LP as the servicer, the banks and other financial institutions party thereto as purchasers, Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Citicorp USA, Inc. and Bank of America, N.A. as Co-Asset Agents, Citicorp USA, Inc., as Administrative Agent, and Citigroup Global Markets Inc. and Banc of America Securities LLC as Joint Lead Arrangers and Joint Bookrunners (11)
4.9	Undertaking Agreement dated as of December 17, 2003 by Equistar Chemicals, LP (11)

Equistar is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of Equistar and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, Equistar agrees to furnish a copy of such instruments to the Commission upon request.

EXECUTIVE COMPENSATION:
10.1	Amended and Restated Lyondell Chemical Company Executive Severance Pay Plan (5)
10.2	Amended and Restated Bonus Plan (5)
10.3	Equistar Chemicals, LP Supplemental Executive Retirement Plan (2)
10.4	Equistar Chemicals, LP Executive Supplementary Savings Plan (2)
10.5	Equistar Chemicals, LP Executive Deferral Plan (2)
10.6	Equistar Chemicals, LP 2001 Incentive Plan (8)
OTHER MATERIAL CONTRACTS:
10.7	Asset Contribution Agreement among Lyondell Chemical Company, Lyondell Petrochemical LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.7(a)	First Amendment, dated as of May 15, 1998, to the Asset Contribution Agreement among Lyondell Chemicals Company, Lyondell Petrochemicals LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.7(b)	Second Amendment to Lyondell Asset Contribution Agreement, dated as of September 30, 2001, among Lyondell Chemical Company, Lyondell Petrochemical LP Inc. and Equistar Chemicals, LP (4)

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10.8	Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.8(a)	First Amendment, dated as of May 15, 1998, to the Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.8(b)	Second Amendment to Millennium Asset Contribution Agreement, dated as of September 30, 2001, among Millennium Petrochemicals Inc., Millennium Petrochemicals LP LLC and Equistar Chemicals, LP (4)
10.9	Agreement and Plan of Merger and Asset Contribution among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and Equistar Chemicals, LP dated as of May 15, 1998 (1)
10.9(a)	First Amendment to Occidental Asset Contribution Agreement, dated as of September 30, 2001, among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., PDG Chemical Inc., Occidental Petrochem Partner GP, Inc. and Equistar Chemicals, LP (4)
10.10	Amended and Restated Parent Agreement dated as of November 6, 2002 (7)
10.11	Ethylene Sales Agreement between Equistar Chemicals, LP and Occidental Chemical Corporation dated as of May 15, 1998 (1)
12	Statement Concerning Computation of Ratios
21	Subsidiaries of Equistar Chemicals, LP
31.1	Rule 13a – 14(a)/15d – 14(a) Certification of Principal Executive Officer
31.2	Rule 13a – 14(a)/15d – 14(a) Certification of Principal Financial Officer
32.1	Section 1350 Certification of Principal Executive Officer
32.2	Section 1350 Certification of Principal Financial Officer
99.1	Consolidated Financial Statements of Lyondell Chemical Company

(1) Filed as an exhibit to Registrant’s Registration Statement on Form S-4 (No. 333-76473) and incorporated herein by reference.

(2) Filed as an exhibit to Registrant’s Registration Statement on Form S-4 (No. 333-70048) and incorporated herein by reference.

(3) Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.

(4) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.

(5) Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

(6) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.

(7) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference.

(8) Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

(9) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

(10) Filed as an exhibit to Registrant’s Registration Statement on Form S-4 (No. 333-111134) and incorporated herein by reference.

(11) Filed as an exhibit to Registrant’s Current Report on Form 8-K dated December 17, 2003 and incorporated herein by reference.

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Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Secretary.

(b) Consolidated Financial Statements and Financial Statement Schedules

(1) Consolidated Financial Statements

(2) Financial Statement Schedules

Financial statement schedules are omitted because they are not applicable or the required information is contained in the Financial Statements or notes thereto.

(c) Reports on Form 8-K

The following Current Reports on Form 8-K were filed or furnished during the quarter ended December 31, 2003 and through the date hereof:

Date of Report	Item Nos.	Financial Statements
October 7, 2003	9 and 12	No
November 17, 2003	5, 7 and 9	No
November 18, 2003	5 and 7	No
December 17, 2003	5 and 7	No

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 11^th day of March, 2004.

EQUISTAR CHEMICALS, LP,
by its General Partner
LYONDELL PETROCHEMICAL G.P. INC.
By:	/s/ MORRIS GELB
	Morris Gelb
	President

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 11^th, 2004.

Name	Title (Lyondell Petrochemical G.P. Inc.)
/s/ MORRIS GELB	President and Director
Morris Gelb
(Principal Executive Officer)
/s/ KAREN A. TWITCHELL	Vice President and Treasurer
Karen A. Twitchell
(Principal Financial and Accounting Officer)
/s/ T. KEVIN DENICOLA	Director
T. Kevin DeNicola
/s/ EDWARD J. DINEEN	Director
Edward J. Dineen

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 11^th day of March, 2004.

EQUISTAR CHEMICALS, LP,
by its General Partner
MILLENNIUM PETROCHEMICALS GP LLC
By:	Millennium Petrochemicals Inc.
By:	/s/ ROBERT E. LEE
	Robert E. Lee
President and Chief Executive Officer

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 11^th, 2004.

Name	Title (Millennium Petrochemicals Inc.)
/s/ ROBERT E. LEE	Director, President and Chief Executive Officer
Robert E. Lee
(Principal Executive Officer)
/s/ JOHN E. LUSHEFSKI	Senior Vice President
John E. Lushefski
(Principal Financial and Accounting Officer)
/s/ C. WILLIAM CARMEAN	Director, Senior Vice President, General Counsel and Secretary
C. William Carmean
/s/ TIMOTHY E. DOWDLE	Director and Senior Vice President
Timothy E. Dowdle

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 11^th day of March, 2004.

Name	Title
/s/ DAN F. SMITH	Chief Executive Officer, Equistar Chemicals, LP, Co-Chairman, Partnership Governance Committee
Dan F. Smith
(Principal Executive Officer)
/s/ CHARLES L. HALL	Vice President and Controller, Equistar Chemicals, LP
Charles L. Hall
(Principal Financial and Accounting Officer)
/s/ T. KEVIN DENICOLA	Member, Partnership Governance Committee
T. Kevin DeNicola
/s/ KERRY A. GALVIN	Member, Partnership Governance Committee
Kerry A. Galvin
/s/ ROBERT E. LEE	Co-Chairman, Partnership Governance Committee
Robert E. Lee
/s/ JOHN E. LUSHEFSKI	Member, Partnership Governance Committee
John E. Lushefski
/s/ C. WILLIAM CARMEAN	Member, Partnership Governance Committee
C. William Carmean

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED

PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED

SECURITIES PURSUANT TO SECTION 12 OF THE ACT

Neither an annual report covering the Registrant’s last fiscal year nor proxy materials with respect to any annual or other meeting of security holders have been sent to security holders.

EX-12

Exhibit 12

EQUISTAR CHEMICALS, LP

STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF

RATIO OF EARNINGS TO FIXED CHARGES

(Millions of dollars)

	Year Ended December 31,
	2003			2002			2001			2000		1999
Income (loss) from continuing operations before income taxes	$	(339	)	$	(246	)	$	(283	)	$	153	$	32
Fixed charges:
Interest expense, gross		215			205			192			185		182
Portion of rentals representative of interest		35			42			37			38		37
Total fixed charges before capitalized interest		250			247			229			223		219
Capitalized interest		—			—			—			—		—
Total fixed charges including capitalized interest		250			247			229			223		219
Earnings (losses)	$	(89	)	$	1		$	(51	)	$	376	$	251
Ratio of earnings (losses) to fixed charges (a)		—			—			—			1.7		1.1

(a) In 2003, 2002 and 2001, earnings were insufficient to cover fixed charges by $339 million, $246 million and $283 million, respectively.

Exhibit 12

EX-21

Exhibit 21

EQUISTAR CHEMICALS, LP

SUBSIDIARIES

Name	Type of Entity	Jurisdiction
Equistar Mont Belvieu Corporation	corporation	Delaware
Equistar Polyproylene, LLC	limited liability	Delaware
Equistar Funding Corporation	corporation	Delaware
Equistar Chemicals de Mexico, Inc.	corporation	Delaware
PD Glycol	corporation	Texas
Equistar Transportation Company, LLC	limited liability	Delaware
Quantum Pipeline Company	corporation	Illinois
Equistar Bayport, LLC	limited liability	Delaware
Equistar Receivables, LLC	limited liability	Delaware
Equistar Receivables II, LLC	limited liability	Delaware
Equistar Olefins Offtake, LP	limited partnership	Delaware
Equistar Olefins Offtake G.P., LLC	limited liability	Delaware
Equistar Olefins G.P., LLC	limited liability	Delaware
Olefins JV, LP	limited partnership	Delaware
Lyondell-Equistar Holdings Partners	joint venture	Delaware

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify that:

1. I have reviewed this annual report on Form 10-K of Equistar Chemicals, LP;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2004	/s/ DAN F. SMITH
	Dan F. Smith
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Charles L. Hall, Vice President, Controller and Chief Accounting Officer of Equistar Chemicals, LP, certify that:

1. I have reviewed this annual report on Form 10-K of Equistar Chemicals, LP;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2004	/s/ CHARLES L. HALL
	Charles L. Hall
	Vice President, Controller and Chief Accounting Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2003 (the “Periodic Report”), I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and

(2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Equistar Chemicals, LP.

Date: March 11, 2004	/s/ DAN F. SMITH
	Dan F. Smith
	Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Equistar Chemicals, LP and will be retained by Equistar Chemicals, LP and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2003 (the “Periodic Report”), I, Charles L. Hall, Vice President, Controller and Chief Accounting Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and

(2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Equistar Chemicals, LP.

Date: March 11, 2004	/s/ CHARLES L. HALL
	Charles L. Hall
	Vice President, Controller and Chief Accounting Officer (Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to Equistar Chemicals, LP and will be retained by Equistar Chemicals, LP and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

Exhibit 99.1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

of Lyondell Chemical Company

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Lyondell Chemical Company and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets.”

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2003, the Company changed its method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation – Transition and Disclosure.”

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 8, 2004

1

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

	For the year ended December 31,
Millions of dollars, except per share data	2003			2002			2001
Sales and other operating revenues	$	3,801		$	3,262		$	3,193
Operating costs and expenses:
Cost of sales		3,599			2,898			2,862
Selling, general and administrative expenses		166			160			157
Research and development expenses		37			30			32
Amortization of goodwill		—			—			30
		3,802			3,088			3,081
Operating income (loss)		(1	)		174			112
Interest expense		(415	)		(384	)		(386	)
Interest income		23			11			17
Other income (expense), net		15			(29	)		(11	)
Loss before equity investments and income taxes		(378	)		(228	)		(268	)
Income (loss) from equity investments:
Equistar Chemicals, LP		(228	)		(117	)		(77	)
LYONDELL-CITGO Refining LP		144			135			129
Other		(19	)		(4	)		(12	)
		(103	)		14			40
Loss before income taxes		(481	)		(214	)		(228	)
Benefit from income taxes		(179	)		(66	)		(78	)
Net loss	$	(302	)	$	(148	)	$	(150	)
Basic and diluted loss per share	$	(1.84	)	$	(1.10	)	$	(1.28	)

See Notes to the Consolidated Financial Statements.

2

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

	December 31,
Millions, except shares and par value data	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	438		$	286
Other short-term investments		—			44
Accounts receivable:
Trade, net		365			340
Related parties		84			56
Inventories		347			344
Prepaid expenses and other current assets		82			66
Deferred tax assets		43			35
Total current assets		1,359			1,171
Property, plant and equipment, net		2,640			2,369
Investments and long-term receivables:
Investment in Equistar Chemicals, LP		965			1,184
Investment in PO joint ventures		866			770
Investment in and receivable from LYONDELL-CITGO Refining LP		232			297
Other investments and long-term receivables		85			98
Goodwill, net		1,080			1,130
Other assets, net		406			429
Total assets	$	7,633		$	7,448
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	284		$	260
Related parties		147			84
Current maturities of long-term debt		—			1
Accrued liabilities		268			288
Total current liabilities		699			633
Long-term debt		4,151			3,926
Other liabilities		680			664
Deferred income taxes		792			881
Commitments and contingencies
Minority interest		155			165
Stockholders’ equity:
Common stock, $1.00 par value, 340,000,000 shares authorized, 142,330,000 and 128,530,000 shares issued, respectively		142			128
Series B common stock, $1.00 par value, 80,000,000 shares authorized, 36,823,421 and 34,568,224 shares issued, respectively		37			35
Additional paid-in capital		1,571			1,380
Retained deficit		(474	)		(18	)
Accumulated other comprehensive loss		(54	)		(271	)
Treasury stock, at cost, 2,360,834 and 2,685,080 shares, respectively		(66	)		(75	)
Total stockholders’ equity		1,156			1,179
Total liabilities and stockholders’ equity	$	7,633		$	7,448

See Notes to the Consolidated Financial Statements.

3

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the year ended December 31,
Millions of dollars	2003			2002			2001
Cash flows from operating activities:
Net loss	$	(302	)	$	(148	)	$	(150	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		250			244			254
Gain on sale of equity interest		(18	)		—			—
Losses from equity investments		247			121			89
Restructuring charges		—			—			63
Deferred income taxes		(172	)		(24	)		3
Debt prepayment premiums and charges		5			23			7
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(54	)		(7	)		154
Inventories		14			(14	)		48
Accounts payable		61			13			(74	)
Income taxes refundable, net of payable		27			62			(70	)
Other assets and liabilities, net		45			19			(125	)
Net cash provided by operating activities		103			289			199
Cash flows from investing activities:
Expenditures for property, plant and equipment		(268	)		(22	)		(68	)
Distributions from affiliates in excess of earnings		111			—			50
Contributions and advances to affiliates		(137	)		(114	)		(173	)
Purchase of equity investment in Equistar		—			(440	)		—
Proceeds from sale of equity interest		28			—			—
Maturity (purchase) of other short-term investments		44			(44	)		—
Other		—			(3	)		—
Net cash used in investing activities		(222	)		(623	)		(191	)
Cash flows from financing activities:
Issuance of long-term debt		318			591			385
Repayment of long-term debt		(103	)		(543	)		(394	)
Issuance of Series B common stock, warrants and right		—			440			—
Issuance of common stock		171			110			—
Dividends paid		(116	)		(109	)		(106	)
Other		(4	)		(18	)		(7	)
Net cash provided by (used in) financing activities		266			471			(122	)
Effect of exchange rate changes on cash		5			3			—
Increase (decrease) in cash and cash equivalents		152			140			(114	)
Cash and cash equivalents at beginning of period		286			146			260
Cash and cash equivalents at end of period	$	438		$	286		$	146

See Notes to the Consolidated Financial Statements.

4

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock					Series B Common Stock		Additional Paid-In Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)
Millions, except shares and per share data	Issued		Treasury
Balance, January 1, 2001	$	120	$	(75	)	$	—	$	854	$	504		$	(258	)
Net loss		—		—			—		—		(150	)		—		$	(150	)
Cash dividends ($0.90 per share)		—		—			—		—		(106	)		—			—
Foreign currency translation		—		—			—		—		—			(53	)		(53	)
Minimum pension liability, net of tax of $46		—		—			—		—		—			(84	)		(84	)
Reissuance of 2,587 treasury shares under benefit plans		—		—			—		—		(1	)		—			—
Other		—		—			—		—		—			(2	)		(2	)
Comprehensive loss																$	(289	)
Balance, December 31, 2001	$	120	$	(75	)	$	—	$	854	$	247		$	(397	)
Net loss		—		—			—		—		(148	)		—		$	(148	)
Cash dividends ($0.90 per share)		—		—			—		—		(109	)		—			—
Foreign currency translation		—		—			—		—		—			189			189
Minimum pension liability, net of tax of $34		—		—			—		—		—			(65	)		(65	)
Reissuance of 2,000 treasury shares under benefit plan		—		—			—		—		—			—			—
Issuance of 34,000,000 shares Series B common stock		—		—			34		405		—			—			—
Issuance of 8,280,000 shares of common stock		8		—			—		102		—			—			—
Issuance of warrants and right		—		—			—		11		—			—			—
Series B stock dividends, 568,224 shares		—		—			1		7		(8	)		—			—
Other		—		—			—		1		—			2			2
Comprehensive loss																$	(22	)
Balance, December 31, 2002	$	128	$	(75	)	$	35	$	1,380	$	(18	)	$	(271	)
Net loss		—		—			—		—		(302	)		—		$	(302	)
Cash dividends ($0.90 per share)		—		—			—		—		(116	)		—			—
Series B stock dividends, 2,255,197 shares		—		—			2		30		(32	)		—			—
Foreign currency translation, net of tax of $13		—		—			—		—		—			191			191
Minimum pension liability, net of tax of $13		—		—			—		—		—			24			24
Reissuance of 324,886 treasury shares under benefit plans		—		9			—		—		(6	)		—			—
Issuance of 13,800,000 shares of common stock		14		—			—		157		—			—			—
Non-qualified stock option exercises		—		—			—		4		—			—			—
Other		—		—			—		—		—			2			2
Comprehensive loss																$	(85	)
Balance, December 31, 2003	$	142	$	(66	)	$	37	$	1,571	$	(474	)	$	(54	)

See Notes to the Consolidated Financial Statements.

5

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and Operations

Lyondell Chemical Company (“Lyondell”) is a leading worldwide producer and marketer of propylene oxide (“PO”), propylene glycol (“PG”), propylene glycol ethers (“PGE”), butanediol (“BDO”), toluene diisocyanate (“TDI”), styrene monomer (“SM”) and methyl tertiary butyl ether (“MTBE”), the principal derivative of tertiary butyl alcohol (“TBA”). These operations are consolidated and reported as the intermediate chemicals and derivatives (“IC&D”) segment.

Lyondell’s operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar Chemicals, LP (“Equistar”) (see Note 5). Lyondell accounts for its investment in Equistar using the equity method of accounting. Equistar’s petrochemicals segment manufactures and markets olefins, including ethylene, propylene and butadiene; aromatics, including benzene and toluene; oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and MTBE. Equistar’s polymers segment manufactures and markets polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders.

Lyondell’s refining operations are conducted through its joint venture ownership interest in LYONDELL-CITGO Refining LP (“LCR”) (see Note 6). Lyondell accounts for its investment in LCR using the equity method of accounting. LCR produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants.

Through April 30, 2002, Lyondell’s methanol operations were conducted through its joint venture ownership interest in Lyondell Methanol Company, L.P. (“LMC”). Effective May 1, 2002, LMC was wholly owned by Lyondell and the methanol results were included in the IC&D segment from that date. The effects of consolidating the LMC operations, which previously had been accounted for using the equity method, were not material.

2. Summary of Significant Accounting Policies

Basis of Presentation—The consolidated financial statements include the accounts of Lyondell and its subsidiaries. Investments in joint ventures where Lyondell exerts a certain level of management control, but lacks full decision making ability over all major issues, are accounted for using the equity method of accounting. Under those circumstances, the equity method is used even though Lyondell’s ownership percentage may exceed 50%.

Revenue Recognition—Revenue from product sales is recognized as risk and title to the product transfer to the customer, which usually occurs when shipment is made.

Cash, Cash Equivalents and Other Short-Term Investments—Cash equivalents and other short-term investments consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts. Cash equivalents include instruments with maturities of three months or less when acquired. Other short-term investments have maturity dates in excess of three months but no more than twelve months and are held to maturity. Cash equivalents and other short-term investments are stated at cost, which approximates fair value. Lyondell’s policy is to invest cash in conservative, highly rated instruments and to limit the amount of credit exposure to any one institution.

Lyondell has no requirements for compensating balances in a specific amount at a specific point in time. Lyondell does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at Lyondell’s discretion. As a result, none of Lyondell’s cash is restricted.

6

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for substantially all inventories, except for materials and supplies, which are valued using the average cost method.

Inventory exchange transactions, which involve fungible commodities and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy.

Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful asset lives, generally 25 years for major manufacturing equipment, 30 years for buildings, 10 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information system equipment. Upon retirement or sale, Lyondell removes the cost of the asset and the related accumulated depreciation from the accounts and reflects any resulting gain or loss in the Consolidated Statement of Income. Lyondell’s policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year.

Long-Lived Asset Impairment—Lyondell evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell the assets.

Goodwill—Goodwill represents the excess of purchase price paid over the fair value assigned to the net tangible and identifiable intangible assets of an acquired business. In 2001, goodwill was amortized using the straight-line method over 40 years, the estimated useful life. Amortization of goodwill ceased effective January 1, 2002 as described below under Accounting and Reporting Changes. Beginning in 2002, goodwill is reviewed for impairment annually.

Turnaround Maintenance and Repair Costs—Costs of maintenance and repairs exceeding $5 million incurred in connection with turnarounds of major units at Lyondell’s manufacturing facilities are deferred and amortized using the straight-line method over the period until the next planned turnaround, generally 4 to 6 years. These costs are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units.

Identifiable Intangible Assets—Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over periods of 3 to 7 years.

Other intangible assets are carried at amortized cost and primarily consist of deferred debt issuance costs, patents and license costs, capacity reservation fees and other long-term processing rights and costs. These assets are amortized using the straight-line method over their estimated useful lives or the term of the related agreement, if shorter.

Environmental Remediation Costs—Anticipated expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimated expenditures have not been discounted to present value.

Minority Interest—Minority interest primarily represents the interest of unaffiliated investors in a partnership that owns Lyondell’s PO/SM II plant at the Channelview, Texas complex. The minority interest share of the partnership’s income or loss is reported in “Other income (expense), net” in the Consolidated Statement of Income.

7

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income Taxes—Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Foreign Currency Translation—The functional currency of Lyondell’s principal non-U.S. operations is the local currency.

Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounting and Reporting Changes—To better reflect the full cost of employee compensation, Lyondell adopted the “fair value” method of accounting for employee stock options, the preferred method as defined by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, in the first quarter 2003. Lyondell is using the prospective transition method, one of three alternatives under SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, for a voluntary change to the fair value method. Under the prospective transition method, an estimate of the fair value of options granted to employees during 2003 and thereafter is charged to earnings over the related vesting periods. This change resulted in an after-tax charge of approximately $3 million for the year ended December 31, 2003.

Prior to 2003, Lyondell accounted for employee stock options under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost was recognized in connection with stock options granted prior to 2003 under Lyondell’s plans. The pro forma effect on net income and earnings per share of measuring compensation expense for such grants in the manner prescribed in SFAS No. 123 is summarized in the table below:

Millions of dollars, except per share data	2003			2002			2001
Reported net loss	$	(302	)	$	(148	)	$	(150	)
Add stock-based compensation expense included in net income, net of tax		3			—			—
Deduct stock-based compensation expense using fair value method for all options awarded, net of tax		(6	)		(9	)		(8	)
Pro forma net loss	$	(305	)	$	(157	)	$	(158	)
Basic and diluted loss per share:
Reported	$	(1.84	)	$	(1.10	)	$	(1.28	)
Pro forma	$	(1.86	)	$	(1.17	)	$	(1.34	)
Assumptions:
Fair value per share of options granted	$	3.02		$	4.21		$	4.08
Fair value assumptions:
Dividend yield		6.37	%		6.06	%		5.88	%
Expected volatility		42	%		47	%		42	%
Risk-free interest rate		4.23	%		5.54	%		5.54	%
Maturity, in years		10			10			10

Effective January 1, 2003, Lyondell implemented SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Lyondell is the classification of gains or losses that result from the early extinguishment of debt as an element of

8

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Lyondell incurred losses on early extinguishment of debt of $15 million and $5 million for the years ended December 31, 2002 and 2001, respectively.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, effective December 31, 2003, and requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. SFAS No. 132 (Revised 2003) also requires Lyondell to disclose pension and postretirement benefit costs in interim-period financial statements beginning in 2004. Lyondell increased its pension disclosures to comply with SFAS No. 132 (Revised 2003). See Note 14.

In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of a retiree health benefit plan to make a one-time election to defer recognition of the effects of the new Medicare legislation in accounting for its plans under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or in making disclosures related to its plans required by SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act, which could require a change in currently reported information. Lyondell elected to make the one-time deferral and is currently evaluating the effect of FSP FAS 106-1.

Effective January 1, 2003, Lyondell adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets, and SFAS No. 146, Accounting for Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. Lyondell’s adoption of the provisions of SFAS No. 143 and SFAS No. 146 had no material impact on its financial statements.

In December 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), primarily to clarify the required accounting for interests in variable interest entities (“VIEs”). This standard replaces FASB Financial Interpretation No. 46, Consolidation of Variable Interest Entities, that was issued in January 2003 to address certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. Lyondell’s application of FIN 46R has no material impact on its consolidated financial statements.

Effective January 1, 2002, Lyondell implemented SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Lyondell reviewed its goodwill for impairment and concluded that goodwill was not impaired. However, Equistar reviewed its goodwill for impairment and concluded that the entire balance was impaired, resulting in a $1.1 billion charge to Equistar’s earnings as of January 1, 2002 (see Note 5). The conclusion was based on a comparison to Equistar’s indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. Lyondell’s 41% share of the Equistar charge was offset by a corresponding reduction in the excess of Lyondell’s 41% share of Equistar’s partners’ capital over the carrying value of Lyondell’s investment in Equistar. Consequently, there was no net effect of the impairment on Lyondell’s earnings or investment in Equistar.

9

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As a result of implementing SFAS No. 142, Lyondell’s pretax income in 2002 and subsequent years is favorably affected by $30 million annually because of the elimination of Lyondell’s goodwill amortization. The following table presents Lyondell’s results of operations for all periods presented as adjusted to eliminate goodwill amortization.

	For the year ended December 31,
Millions of dollars, except per share data	2003			2002			2001
Reported net loss	$	(302	)	$	(148	)	$	(150	)
Add back: goodwill amortization, net of tax		—			—			22
Adjusted net loss	$	(302	)	$	(148	)	$	(128	)
Basic and diluted loss per share:
Reported net loss	$	(1.84	)	$	(1.10	)	$	(1.28	)
Add back: goodwill amortization, net of tax		—			—			.19
Adjusted net loss	$	(1.84	)	$	(1.10	)	$	(1.09	)

Reclassifications—Certain previously reported amounts have been reclassified to conform to classifications adopted in 2003.

3. Restructuring Charges

During 2001, Lyondell recognized a pretax charge of $63 million, which is included in cost of sales in the Consolidated Statements of Income, associated with its decision to exit the aliphatic diisocyanates (“ADI”) business. The decision reflected the limited ongoing strategic value to Lyondell of the ADI business and Lyondell’s poor competitive position in the ADI business. The decision involved the shutdown of the ADI manufacturing unit at the Lake Charles, Louisiana facility. The action included a 20% reduction of the Lake Charles workforce, as well as ADI-related research and sales positions at other locations. The $63 million charge included $45 million to adjust the carrying values of the ADI assets to their estimated net realizable value, $15 million of accrued liabilities for exit costs and $3 million for severance and other employee-related costs for nearly 100 employee positions that were eliminated. In addition, cash proceeds from asset sales exceeded asset carrying values by $2 million in 2002 and were credited to the accrual. Payments of $17 million for exit costs and $3 million for severance and other employee-related costs were made through December 31, 2003.

4. Investment in PO Joint Ventures

In March 2000, Lyondell together with with Bayer AG and Bayer Corporation (collectively “Bayer”) entered into a U.S. PO manufacturing joint venture (the “U.S. PO Joint Venture”) and a separate joint venture with Bayer for certain related PO technology (the “PO Technology Joint Venture”). Lyondell contributed approximately $1.2 billion of assets at historical book value to the joint ventures, and allocated $522 million of that book value to the partnership interest sold to Bayer. Bayer’s ownership interest represents ownership of an in-kind portion of the PO production of the U.S. PO Joint Venture. Bayer’s 2003 share of PO production was approximately 1.55 billion pounds. Lyondell takes in kind the remaining PO production and all co-product (SM and TBA) production from the U.S. PO Joint Venture.

In December 2000, Lyondell and Bayer formed a separate joint venture (the “European PO Joint Venture”), for the construction of a world-scale PO/SM plant at Maasvlakte near Rotterdam, the Netherlands. Lyondell and Bayer each have a 50% interest and bore 50% of the plant construction costs. The Maasvlakte PO/SM plant began production in the fourth quarter 2003. Lyondell and Bayer each are entitled to 50% of the PO and SM production of the European PO Joint Venture.

10

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell and Bayer do not share marketing or product sales under either the U.S. PO Joint Venture or European PO Joint Venture (collectively, the “PO Joint Ventures”). Lyondell operates the PO Joint Ventures’ plants and arranges and coordinates the logistics of product delivery. The partners share in the cost of production and logistics based on their product offtake.

Lyondell reports the cost of its product offtake as inventory and cost of sales in its Consolidated Financial Statements. Related cash flows are reported in the operating cash flow section of the Consolidated Statements of Cash Flows. Lyondell’s investment in the PO Joint Ventures is reduced through recognition of its share of the depreciation and amortization of the assets of the joint ventures, which is included in cost of sales. Lyondell’s contributions to the PO Joint Ventures are reported as “Investment in PO joint ventures” in the accompanying Consolidated Balance Sheets and as “Contributions and advances to affiliates” in the Consolidated Statements of Cash Flows. Other changes in the investment balance are principally due to additional capital investments by Lyondell in the PO joint ventures. Total assets of the PO joint ventures, primarily property, plant and equipment, were $1.9 billion and $1.6 billion at December 31, 2003 and 2002, respectively. During 2003 and 2002, Lyondell capitalized $19 million and $10 million, respectively, of interest related to the Maasvlakte PO plant construction project and included the capitalized amounts in its investment in the European PO Joint Venture.

Changes in Lyondell’s investment in 2003 and 2002 are summarized as follows:

	U.S. PO Joint Venture			European PO Joint Venture			Total PO Joint Ventures
Investment in PO joint ventures – January 1, 2002	$	624		$	93		$	717
Cash contributions		9			45			54
Capitalized interest		—			10			10
Depreciation and amortization		(32	)		—			(32	)
Start-up activities		—			(2	)		(2	)
Effect of exchange rate changes		—			23			23
Investment in PO joint ventures – December 31, 2002		601			169			770
Cash contributions		1			87			88
Capitalized interest		—			19			19
Depreciation and amortization		(32	)		(1	)		(33	)
Start-up activities		—			(20	)		(20	)
Effect of exchange rate changes		—			42			42
Investment in PO joint ventures – December 31, 2003	$	570		$	296		$	866

5. Investment in Equistar Chemicals, LP

Equistar, which commenced operations on December 1, 1997, was formed by Lyondell and Millennium Chemicals Inc. and subsidiaries (“Millennium”). On May 15, 1998, Equistar was expanded with the contribution of certain assets from the chemical division of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”). Until August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental. On August 22, 2002, Lyondell purchased Occidental’s interest in Equistar and, as a result, Lyondell’s ownership interest in Equistar increased to 70.5%.

Because the partners jointly control certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the partnership, Lyondell accounts for its investment in Equistar using the equity method of accounting. As a partnership, Equistar is not subject to federal income taxes.

11

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information for Equistar follows:

	December 31,
Millions of dollars	2003		2002
BALANCE SHEETS
Total current assets	$	1,261	$	1,126
Property, plant and equipment, net		3,334		3,565
Investments and other assets, net		433		361
Total assets	$	5,028	$	5,052
Current maturities of long-term debt	$	—	$	32
Other current liabilities		754		682
Long-term debt		2,314		2,196
Other liabilities and deferred revenues		359		221
Partners’ capital		1,601		1,921
Total liabilities and partners’ capital	$	5,028	$	5,052

	For the year ended December 31,
Millions of dollars	2003			2002			2001
STATEMENTS OF INCOME
Sales and other operating revenues	$	6,545		$	5,537		$	5,909
Cost of sales		6,387			5,388			5,755
Selling, general and administrative expenses		182			155			181
Research and development expense		38			38			39
Losses on asset dispositions		27			—			—
Amortization of goodwill		—			—			33
Operating loss		(89	)		(44	)		(99	)
Interest expense, net		207			204			189
Other income (expense), net		(43	)		2			5
Loss before cumulative effect of accounting change		(339	)		(246	)		(283	)
Cumulative effect of accounting change		—			(1,053	)		—
Net loss	$	(339	)	$	(1,299	)	$	(283	)
OTHER INFORMATION
Depreciation and amortization	$	307		$	298		$	319
Expenditures for property, plant and equipment		106			118			110

As discussed in Note 2, as part of the implementation of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002, the entire unamortized balance of Equistar’s goodwill was determined to be impaired. Accordingly, Equistar’s earnings in 2002 were reduced by $1.1 billion. Lyondell’s 41% share of the Equistar charge was offset by a corresponding reduction in the excess of Lyondell’s 41% share of Equistar’s partners’ capital over the carrying value of Lyondell’s investment in Equistar. Consequently, there was no net effect of the impairment on Lyondell’s earnings or investment in Equistar.

Lyondell’s income or loss from its investment in Equistar consists of Lyondell’s share of Equistar’s income or loss before the cumulative effect of the accounting change and accretion of Lyondell’s investment in Equistar up to its underlying equity in Equistar’s net assets. At December 31, 2003, Lyondell’s underlying equity in Equistar’s net assets exceeded the carrying value of its investment in Equistar by approximately $164 million. This difference is being recognized in income over the next 14 years.

12

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. With the exception of a pre-existing third-party product supply agreement expiring in 2015, Lyondell is required to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities from Equistar. In addition, Lyondell licenses MTBE technology to Equistar, and purchases a portion of the MTBE produced by Equistar at market-related prices. Lyondell also purchases natural gas used in its methanol facility from Equistar. Equistar’s sales to Lyondell were approximately $708 million, $535 million and $491 million for the years ended December 31, 2003, 2002 and 2001, respectively. In addition, Equistar purchased approximately $5 million, $1 million and $4 million of products from Lyondell for the years ended December 31, 2003, 2002 and 2001, respectively.

Through December 31, 2003, Equistar acted as sales agent for the methanol products of Lyondell. Equistar also provides operating and other services for Lyondell including the lease to Lyondell by Equistar of the real property on which the methanol plant is located, for which Equistar billed Lyondell approximately $7 million in 2003 and approximately $6 million in 2002 and 2001.

Sales by Equistar to LCR, primarily of certain olefins by-products and processing services, were approximately $469 million, $344 million and $380 million for the years ended December 31, 2003, 2002 and 2001, respectively. Purchases by Equistar from LCR, primarily of refinery products, during the years ended December 31, 2003, 2002 and 2001 totaled approximately $227 million, $219 million and $205 million, respectively.

Under a shared service agreement, Lyondell provides office space and various services to Equistar, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar for its share of the cost of such services. Direct costs, incurred exclusively for Equistar, are also charged to Equistar. Billings by Lyondell to Equistar were approximately $154 million, $134 million and $135 million for the years ended December 31, 2003, 2002 and 2001, respectively. Costs related to a limited number of shared services, primarily engineering, continue to be incurred by Equistar on behalf of Lyondell. In such cases, Equistar charges Lyondell for its share of such costs. Billings by Equistar to Lyondell were approximately $8 million, $7 million and $9 million for the years ended December 31, 2003, 2002 and 2001, respectively.

6. Investment in LYONDELL-CITGO Refining LP

In July 1993, LCR was formed to own and operate Lyondell’s refining business. LCR is owned by subsidiaries of Lyondell and CITGO Petroleum Corporation (“CITGO”). Lyondell owns 58.75% of the partnership. Lyondell’s income from its investment in LCR presented in the Consolidated Statements of Income consists of Lyondell’s share of LCR’s net income and accretion of Lyondell’s investment in LCR up to its underlying equity in LCR’s net assets. At December 31, 2003, Lyondell’s underlying equity in LCR’s net assets exceeded its investment in LCR by approximately $267 million. This difference is being recognized in income over the next 24 years.

13

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information for LCR is as follows:

	December 31,
Millions of dollars	2003		2002
BALANCE SHEETS
Total current assets	$	316	$	357
Property, plant and equipment, net		1,240		1,312
Other assets		81		88
Total assets	$	1,637	$	1,757
Current liabilities	$	386	$	514
Long-term debt		450		450
Loans payable to partners		264		264
Other liabilities		114		126
Partners’ capital		423		403
Total liabilities and partners’ capital	$	1,637	$	1,757

	For the year ended December 31,
Millions of dollars	2003		2002			2001
STATEMENTS OF INCOME
Sales and other operating revenues	$	4,162	$	3,392		$	3,284
Cost of sales		3,842		3,093			2,967
Selling, general and administrative expenses		56		53			61
Operating income		264		246			256
Interest expense, net		36		32			51
Other expense		—		(1	)		(2	)
Net income	$	228	$	213		$	203
OTHER INFORMATION
Depreciation and amortization	$	113	$	116		$	108
Expenditures for property, plant and equipment		46		65			109

LCR maintains a $450 million term bank loan facility and a $70 million working capital revolving credit facility. The facilities are secured by substantially all of the assets of LCR. The $70 million revolving credit facility was undrawn at December 31, 2003. Amounts available under the revolving credit facility are reduced to the extent of outstanding letters of credit provided under the credit facility, which totaled $13 million as of December 31, 2003.

Loans payable to partners at December 31, 2003 included $229 million payable to Lyondell and $35 million payable to CITGO. In 2003, Lyondell and CITGO contributed additional capital to LCR by converting $10 million and $7 million, respectively, of accrued interest on these loans to LCR partners’ capital.

At December 31, 2003, LCR had $450 million outstanding under an eighteen-month term bank loan facility and a $70 million working capital revolving credit facility (the “Facilities”), both of which expire in June 2004. Management of LCR, Lyondell and CITGO are pursuing a refinancing of the Facilities and expect to complete the refinancing before the Facilities expire. On March 11, 2004, LCR entered into an agreement with a major financial institution to refinance the Facilities on a long-term basis, with interest of LIBOR plus 3%, but in no event more than LIBOR plus 8%, and with other terms substantially similar to the current Facilities. The closing of the new facility is subject to normal conditions of closing, as well as the maintenance of certain financial and operating ratios. Also, subsequent to December 31, 2003, Lyondell and CITGO agreed to extend the due date of the loans payable to partners, which were scheduled to mature in December 2004, to March 31, 2005.

Sales from LCR to Equistar, primarily of refinery products, were approximately $227 million, $219 million and $205 million for the years ended December 31, 2003, 2002 and 2001, respectively. Purchases by LCR from Equistar, primarily of certain olefins by-products and processing services, during the years ended December 31, 2003, 2002 and 2001 totaled approximately $470 million, $344 million and $380 million, respectively.

14

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell sells MTBE to and has various service and cost sharing arrangements with LCR. Billings by Lyondell to LCR were approximately $6 million, $4 million and $3 million for the years ended December 31, 2003, 2002 and 2001, respectively. Billings from LCR to Lyondell were approximately $1 million, $2 million and $3 million for the years ended December 31, 2003, 2002 and 2001, respectively.

LCR has a long-term crude supply agreement (“Crude Supply Agreement” or “CSA”) with Lagoven, S.A., now known as PDVSA Petróleo, S.A. (“PDVSA Oil”), an affiliate of CITGO (see “Crude Supply Agreement” section of Note 16). The CSA, which expires on December 31, 2017, incorporates formula prices to be paid by LCR for the crude oil supplied based on the market value of a slate of refined products deemed to be produced from each particular crude oil or raw material, less: (1) certain deemed refining costs, adjustable for inflation and energy costs; (2) certain actual costs; and (3) a deemed margin, which varies according to the grade of crude oil or other raw material delivered. The actual refining margin earned by LCR may vary from the formula amount depending on, among other things, timing differences in incorporating changes in refined product market values and energy costs into the CSA’s deemed margin calculations and the efficiency with which LCR conducts its operations from time to time. Although LCR believes that the CSA reduces the volatility of LCR’s earnings and cash flows over the long-term, the CSA also limits LCR’s ability to enjoy higher margins during periods when the market price of crude oil is low relative to then-current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the CSA, the benefits of this agreement to LCR could be substantially diminished, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR’s costs for crude oil under the CSA may be higher than might otherwise be available to LCR from other sources. A disparate increase in the market price of heavy crude oil relative to the prices of heavy crude oil under the CSA has the tendency to make continued performance of its obligations under the CSA less attractive to PDVSA Oil.

In addition, under the terms of a long-term product sales agreement (“Products Agreement”), CITGO purchases substantially all of the refined products produced by LCR. Both PDVSA Oil and CITGO are direct or indirect, wholly owned subsidiaries of Petróleos de Venezuela, S.A., the national oil company of the Republic of Venezuela.

7. Accounts Receivable

Lyondell sells its products primarily to other industrial concerns in the petrochemicals and refining industries. Lyondell performs ongoing credit evaluations of its customers’ financial condition and, in certain circumstances, requires letters of credit from them. Lyondell’s allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $7 million and $6 million at December 31, 2003 and 2002, respectively.

In December 2003, Lyondell entered into a new $100 million, four-year, accounts receivable sales facility to replace its previous accounts receivable sales program. Pursuant to the facility, Lyondell sells, through a wholly owned bankruptcy remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of domestic accounts receivable to financial institutions participating in the facility. Lyondell is responsible for servicing the receivables.

The amount of the interest in the pool of receivables permitted to be sold is determined by a formula. The agreement currently permits the sale of up to $75 million of total interest in domestic accounts receivable, which was the balance sold under the new facility as of December 31, 2003. At December 31, 2002, the balance sold under the previous arrangement was $65 million. Accounts receivable in the Consolidated Balance Sheets are reduced by the sales of interests in the pool. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold. Increases and decreases in the amount sold are reflected in operating cash flows in the Consolidated Statements of Cash Flows. Fees related to the sales are included in “Other income (expense), net” in the Consolidated Statements of Income.

15

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Inventories

Inventories consisted of the following components at December 31:

Millions of dollars	2003		2002
Finished goods	$	269	$	271
Work-in-process		7		7
Raw materials		33		29
Materials and supplies		38		37
Total inventories	$	347	$	344

At December 31, 2003, approximately 94% of inventories, excluding materials and supplies, were valued using the LIFO method.

9. Property, Plant and Equipment, Goodwill and Other Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:

Millions of dollars	2003			2002
Land	$	11		$	11
Manufacturing facilities and equipment		3,453			2,959
Construction in progress		15			30
Total property, plant and equipment		3,479			3,000
Less accumulated depreciation		(839	)		(631	)
Property, plant and equipment, net	$	2,640		$	2,369

In association with a refinancing during May 2003, Lyondell exercised its option under the terms of the Botlek BDO facility lease to purchase the Botlek BDO plant in The Netherlands for $218 million. See also Note 11.

No interest was capitalized to property, plant and equipment during 2003, 2002 and 2001. See Note 4 for other interest capitalized.

Goodwill, at cost, and the related accumulated amortization were as follows at December 31:

Millions of dollars	2003			2002
Goodwill	$	1,185		$	1,240
Less accumulated amortization		(105	)		(110	)
Goodwill, net	$	1,080		$	1,130

The goodwill decrease in 2003 reflects the favorable settlement of tax-related contingencies associated with Lyondell’s acquisition of ARCO Chemical Company in 1998.

16

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The components of other assets at cost, and the related accumulated amortization were as follows at December 31:

	2003							2002
Millions of dollars	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Intangible assets:
Debt issuance costs	$	128	$	(61	)	$	67	$	135	$	(59	)	$	76
Technology costs		132		(73	)		59		132		(63	)		69
Software costs		67		(29	)		38		62		(19	)		43
Turnaround costs		80		(40	)		40		60		(26	)		34
Other		91		(66	)		25		87		(62	)		25
Total intangible assets	$	498	$	(269	)		229	$	476	$	(229	)		247
Company-owned life insurance							148							147
Other							29							35
Total other assets						$	406						$	429

Scheduled amortization of these intangible assets for the next five years is estimated to be $37 million in 2004, $37 million in 2005, $37 million in 2006, $28 million in 2007 and $24 million in 2008.

Depreciation and amortization expense is summarized as follows:

Millions of dollars	2003		2002		2001
Property, plant and equipment	$	182	$	137	$	124
MTBE contract		—		36		33
Investment in PO Joint Venture		32		32		31
Goodwill		—		—		30
Turnaround costs		12		14		16
Technology costs		10		12		12
Software costs		10		10		6
Other		4		3		2
Total depreciation and amortization	$	250	$	244	$	254

The increase in depreciation from 2002 to 2003 for property, plant and equipment was due to a reduction in the estimated remaining useful lives of certain production units and the currency translation effects of a stronger euro.

In addition to the depreciation and amortization shown above, amortization of debt issuance costs of $17 million, $16 million and $15 million in 2003, 2002 and 2001, respectively, is included in interest expense in the Consolidated Statements of Income.

17

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Accrued Liabilities

Accrued liabilities consisted of the following components at December 31:

Millions of dollars	2003		2002
Interest	$	71	$	70
Taxes other than income		44		51
Payroll and benefits		41		45
Contractual obligations		37		44
Deferred revenues		31		19
Income taxes		8		25
Other		36		34
Total accrued liabilities	$	268	$	288

11. Long-Term Debt

Long-term debt consisted of the following at December 31:

Millions of dollars	2003			2002
Bank credit facility:
Revolving credit facility	$	—		$	—
Term Loan E due 2006, LIBOR plus 4.375%		—			103
Other debt obligations:
Senior Secured Notes, Series A due 2007, 9.625%		900			900
Senior Secured Notes, Series B due 2007, 9.875%		1,000			1,000
Senior Secured Notes due 2008, 9.5%		730			730
Senior Secured Notes due 2012, 11.125%		278			278
Senior Secured Notes due 2013, 10.5%		325			—
Senior Subordinated Notes due 2009, 10.875%		500			500
Debentures due 2005, 9.375%		100			100
Debentures due 2010, 10.25%		100			100
Debentures due 2020, 9.8%		225			225
Other		2			1
Unamortized discount		(9	)		(10	)
Total		4,151			3,927
Less current maturities		—			1
Long-term debt	$	4,151		$	3,926

Borrowing under Term Loan E had a weighted average interest rate of 5.77% and 6.25% during 2003 and 2002, respectively.

Amounts available under the credit facility, which was undrawn at December 31, 2003, are reduced to the extent of certain outstanding letters of credit. Lyondell had outstanding letters of credit totaling $60 million at December 31, 2003, of which $50 million reduced the available credit facility. The credit facility and secured notes are secured by liens on all personal property, mortgages on certain production facilities located in Pasadena and Channelview, Texas and Lake Charles, Louisiana, substantially all equity interests in domestic subsidiaries and 65% of the stock of foreign subsidiaries directly owned by Lyondell.

18

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Aggregate maturities of all long-term debt during the next five years are $100 million in 2005, $1.9 billion in 2007, $730 million in 2008 and $1.5 billion thereafter. There are no scheduled maturities of long-term debt in 2004 and 2006.

In May 2003, Lyondell issued $325 million of 10.5% senior secured notes due in 2013. The proceeds, net of related fees, were used to prepay the $103 million outstanding under Term Loan E and to purchase the leased Botlek BDO plant. The related Botlek BDO facility lease was terminated. Upon application of FIN 46R, the Botlek BDO facility lease arrangement would have resulted in a similar increase in total debt. See Note 9.

In March 2003, Lyondell obtained amendments to its credit facility to provide additional financial flexibility by easing certain financial ratio requirements.

In December 2002, Lyondell issued $337 million of 9.5% senior secured notes due 2008, using net proceeds, after discount and fees, of $321 million to prepay $315 million of the amount outstanding under Term Loan E of the credit facility and to pay a $6 million prepayment premium.

In July 2002, Lyondell completed debt and equity offerings, as well as amendments to its credit facility and to the indentures related to its senior notes. Lyondell issued $278 million of 11.125% senior secured notes due 2012, using proceeds of $204 million to prepay $200 million of the amount outstanding under Term Loan E of the credit facility and to pay a $4 million prepayment premium. The remaining net proceeds, after discount and fees, of approximately $65 million were used for general corporate purposes. As discussed in Note 17, Lyondell also issued equity securities, receiving net proceeds of $110 million that were also used for general corporate purposes.

The amended credit facility extended the maturity of the revolving credit facility from July 2003 to June 2005, reduced the size of the revolving credit facility from $500 million to $350 million, made certain financial ratio requirements less restrictive, made the covenant limiting acquisitions more restrictive and added a covenant limiting certain non-regulatory capital expenditures. Also, after receiving consents from the holders of the senior secured and senior subordinated notes, Lyondell amended the indentures related to those notes. The principal indenture amendment revised a limitation that had restricted payment of Lyondell’s current $0.90 per share annual cash dividend to a specified number of shares. As a result of the amendment, the number of shares with respect to which an annual cash dividend of up to $0.90 per share may be paid is no longer restricted by the covenants. Lyondell paid fees totaling $17 million related to the amendments of the indentures and the credit facility.

The amended credit facility and the amended indentures pertaining to Lyondell’s senior secured notes and senior subordinated notes contain covenants that, subject to exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, dividends, investments, non-regulatory capital expenditures, certain payments, sales of assets and mergers. In addition, the credit facility requires Lyondell to maintain specified financial ratios and consolidated net worth, as defined in the credit facility. The breach of these covenants would permit the lenders and noteholders to declare any outstanding debt immediately payable and would permit the lenders under Lyondell’s credit facility to terminate future lending commitments. Furthermore, under certain circumstances, a default under Equistar’s debt instruments would constitute a cross-default under Lyondell’s credit facility, which, under certain circumstances, would then constitute a default under the indentures. Lyondell was in compliance with all such covenants as of December 31, 2003. Subsequent to December 31, 2003, as a result of ongoing adverse conditions in the industry, Lyondell obtained further amendments to its credit facility to provide additional financial flexibility by easing certain financial ratio requirements. Beginning December 31, 2004, the financial ratio requirements under the facility become increasingly restrictive over time.

Lyondell is guarantor of $300 million of Equistar debt. See also Note 13.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Lease Commitments

Lyondell leases various facilities and equipment under noncancelable operating lease arrangements for varying periods. As of December 31, 2003, future minimum lease payments for the next five years and thereafter, relating to all noncancelable operating leases with terms in excess of one year, were as follows:

Millions of dollars
2004	$	66
2005		61
2006		55
2007		50
2008		35
Thereafter		103
Total minimum lease payments	$	370

Operating lease net rental expenses for 2003, 2002 and 2001 were $68 million, $71 million and $70 million, respectively.

13. Financial Instruments and Derivatives

The effects of foreign exchange transactions and foreign currency derivative instruments as well as commodity-related derivative instruments were not significant during 2003, 2002, and 2001.

The carrying value and the estimated fair value of Lyondell’s non-current, non-derivative financial instruments as of December 31, 2003 and 2002 are shown in the table below:

	2003				2002
Millions of dollars	Carrying Value		Fair Value		Carrying Value		Fair Value
Investments and long-term receivables	$	2,148	$	2,648	$	2,349	$	2,630
Long-term debt, including current maturities		4,151		4,383		3,927		3,367

The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, other short-term investments, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. Investments and long-term receivables, which consist primarily of equity investments, were valued using current financial and other available information. Long-term debt, including amounts due within one year, was valued based upon the borrowing rates currently available to Lyondell for debt with terms and average maturities similar to Lyondell’s debt portfolio. Lyondell estimates that the fair value of its guarantee of certain Equistar debt (see Note 11) is not significant due to the low probability of future payments under the guarantee provisions.

Lyondell is exposed to credit risk with respect to accounts receivable. Lyondell performs ongoing credit evaluations of its customers and, in certain circumstances, requires letters of credit from them. See Note 7.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Pension and Other Postretirement Benefits

Lyondell has defined benefit pension plans which cover employees in the United States and a number of other countries. Retirement benefits are generally based on years of service and the employee’s highest three consecutive years of compensation during the last ten years of service. Lyondell funds the plans through periodic contributions to pension trust funds as provided by applicable law. Lyondell also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the U.S. tax-qualified plans’ limits. In addition, Lyondell sponsors unfunded postretirement benefit plans other than pensions for U.S. employees, which provide medical and life insurance benefits. The postretirement medical plans are contributory, while the life insurance plans are generally noncontributory. The life insurance benefits are provided to employees who retired before July 1, 2002.

21

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the plans:

	Pension Benefits						Other Postretirement Benefits
Millions of dollars	2003			2002			2003			2002
Change in benefit obligation:
Benefit obligation, January 1	$	609		$	554		$	88		$	91
Service cost		19			17			2			2
Interest cost		38			35			6			5
Plan amendments		—			(19	)		—			(9	)
Actuarial loss		11			35			2			4
Benefits paid		(41	)		(33	)		(4	)		(5	)
Other		3			1			—			—
Foreign exchange effects		55			19			—			—
Benefit obligation, December 31		694			609			94			88
Change in plan assets:
Fair value of plan assets, January 1		307			364
Actual return on plan assets		52			(45	)
Company contributions		15			4
Benefits paid		(41	)		(33	)
Foreign exchange effects		23			17
Fair value of plan assets, December 31		356			307
Funded status		(338	)		(302	)		(94	)		(88	)
Contributions		—			2			—			—
Unrecognized actuarial and investment loss		321			326			13			11
Unrecognized prior service benefit		(10	)		(12	)		(11	)		(12	)
Unrecognized transition obligation		3			3			—			—
Net amount recognized	$	(24	)	$	17		$	(92	)	$	(89	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid benefit cost	$	24		$	21		$	—		$	—
Accrued benefit liability		(232	)		(213	)		(92	)		(89	)
Intangible asset		—			3			—			—
Accumulated other comprehensive loss – pretax		184			206			—			—
Net amount recognized	$	(24	)	$	17		$	(92	)	$	(89	)
Additional Information:
Accumulated benefit obligation for defined benefit plans, December 31	$	583		$	515
Increase (decrease) in minimum liability included in other comprehensive loss		(20	)		79

The non-U.S. pension plans constituted approximately 27% and 22% of the benefit obligation and 39% and 32% of the plan assets at December 31, 2003 and 2002, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The decrease in pension benefit obligations due to plan amendments in 2002 primarily resulted from changes limiting lump sum payouts of pension benefits in certain circumstances. The decrease in other postretirement benefit obligations due to plan amendments in 2002 primarily resulted from a change discontinuing life insurance benefits for employees retiring after July 1, 2002.

Projected benefit obligations exceed the fair value of plan assets for all plans at December 31, 2003 and 2002. Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

Millions of dollars	2003		2002
Accumulated benefit obligations[95559.cov]	$	464	$	430
Fair value of assets		235		221

Net periodic pension and other postretirement benefit costs included the following components:

	Pension Benefits									Other Postretirement Benefits
Millions of dollars	2003			2002			2001			2003			2002			2001
Components of net periodic benefit cost:
Service cost	$	19		$	17		$	15		$	2		$	2		$	2
Interest cost		38			35			36			6			5			5
Actual (gain) loss on plan assets		(52	)		45			26			—			—			—
Less-unrecognized gain (loss)		33			(77	)		(62	)		—			—			—
Recognized gain on plan assets		(19	)		(32	)		(36	)		—			—			—
Prior service cost amortization		(2	)		(2	)		—			(1	)		(1	)		(2	)
Actuarial and investment loss amortization		23			15			9			—			—			—
Net effect of curtailments, settlements and special termination benefits		—			—			9			—			—			1
Net periodic benefit cost	$	59		$	33		$	33		$	7		$	6		$	6

The 2001 net effect of curtailments, settlements and special termination benefits was primarily due to lump-sum settlements taken by retiring employees, which resulted in a net charge. Non-U.S. pension plans comprised $10 million, $5 million and $1 million of net periodic pension cost for 2003, 2002 and 2001, respectively.

The assumptions used in determining the net benefit liabilities for the U.S. plans were as follows at December 31:

	Pension Benefits		Other Postretirement Benefits
	2003	2002	2003	2002
Weighted-average assumptions as of December 31:
Domestic:
Discount rate	6.25%	6.50%	6.25%	6.50%
Rate of compensation increase	4.50%	4.50%

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The assumptions used in determining net benefit costs for the U.S. plans were as follows:

	Pension Benefits						Other Postretirement Benefits
	2003		2002		2001		2003		2002		2001
Weighted-average assumptions for the year:
Domestic:
Discount rate	6.50	%	7.00	%	7.50	%	6.50	%	7.00	%	7.50	%
Expected return on plan assets	8.00	%	9.50	%	9.50	%
Rate of compensation increase	4.50	%	4.50	%	4.50	%

The assumptions used for non-U.S. plans were similar to those used for the U.S. plans but reflect the economic environment of the applicable country.

Management’s goal is to manage pension investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Targeted asset allocations of 55% U.S. equity securities, 15% non-U.S. equity securities, and 30% fixed income securities were adopted in 2003 for the plans based on recommendations by Lyondell’s independent pension investment advisor. Investment policies prohibit investments in securities issued by Lyondell or investment in speculative derivative instruments. The investments are marketable securities that provide sufficient liquidity to meet expected benefit obligation payments.

Prior to 2003, Lyondell’s expected long-term rate of return on plan assets of 9.5% had been based on the average level of earnings that its independent pension investment advisor had advised could be expected to be earned over time, using the expected returns for the above-noted asset allocations that had been recommended by the advisor, and had been adopted for the plans. Over the three-year period ended December 31, 2003, Lyondell’s actual return on plan assets was a loss averaging 1.8% per year. In 2003, Lyondell reviewed its asset allocation and expected long-term rate of return assumptions, and obtained an updated asset allocation study from the independent pension investment advisor, including updated expectations for long-term market earnings rates for various classes of investments. Based on this review, Lyondell reduced its expected long-term rate of return on plan assets to 8%, and did not significantly change its plan asset allocations.

Lyondell’s pension plan weighted-average asset allocations by asset category for its pension plans generally are as follows at December 31:

	2003 Policy		2003		2002
Asset Category:
U.S. equity securities	55	%	53	%	48	%
Non-U.S. equity securities	15	%	18	%	20	%
Fixed income securities	30	%	29	%	32	%
Total	100	%	100	%	100	%

Lyondell expects to contribute approximately $57 million to its pension plans in 2004.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2003, future expected benefit payments, which reflect expected future service, as appropriate, were as follows:

Millions of dollars	Pension Benefits		Other Benefits
2004	$	22	$	6
2005		26		6
2006		25		6
2007		33		6
2008		37		7
2009 through 2013		208		37

The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2003 was 10% for 2004, 7% for 2005 through 2007, and 5% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Lyondell’s maximum contribution level to the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 2003 by $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended.

Lyondell also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Lyondell were $10 million, $10 million and $12 million in 2003, 2002 and 2001, respectively.

15. Income Taxes

The significant components of the provision for income taxes were as follows for the years ended December 31:

Millions of dollars	2003			2002			2001
Current:
Federal	$	—		$	(42	)	$	(94	)
Foreign		—			(3	)		15
State		(7	)		3			(2	)
Total current		(7	)		(42	)		(81	)
Deferred:
Federal		(159	)		(52	)		(35	)
Foreign		(18	)		26			52
State		5			2			(14	)
Total deferred		(172	)		(24	)		3
Income tax benefit before tax effects of other comprehensive income		(179	)		(66	)		(78	)
Tax effects of elements of other comprehensive income:
Cumulative translation adjustment		13			—			—
Minimum pension liability		13			(34	)		(46	)
Other		1			—			(1	)
Total income tax benefit on comprehensive income	$	(152	)	$	(100	)	$	(125	)

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Significant components of Lyondell’s deferred tax liabilities and assets were as follows as of December 31:

Millions of dollars	2003			2002
Deferred tax liabilities:
Accelerated tax depreciation	$	751		$	687
Investments in joint venture partnerships		802			846
Goodwill and other intangible assets		54			39
Other		60			29
Total deferred tax liabilities		1,667			1,601
Deferred tax assets:
Net operating loss carryforwards		573			443
Employee benefit plans		195			187
Deferred charges and revenues		60			63
Federal benefit attributable to deferred foreign taxes		50			43
Other		84			48
Total deferred tax assets		962			784
Deferred tax asset valuation allowance		(44	)		(29	)
Net deferred tax assets		918			755
Net deferred tax liabilities		749			846
Add current portion of deferred tax assets		43			35
Long-term deferred income taxes	$	792		$	881

Lyondell has U.S. federal and non U.S. tax loss carryforwards, the tax benefit of which would be $573 million at the current statutory rates. The federal loss carryforward benefits of $464 million will begin expiring in 2014 and the foreign tax loss carryforward benefits in excess of the valuation reserve have no expiration date.

During 2002, Lyondell converted certain intercompany debt of a French partnership into equity, thereby creating French taxable income that absorbed approximately 71 million euros, or $82 million, of French five-year loss carryforwards. The new equity can be reconverted into debt over the following 10 years, assuming business results improve. Such reconversion will give rise to French tax losses equal to any equity reconverted to debt. Lyondell has recorded a deferred tax asset and a related valuation reserve of $31 million at December 31, 2003 in connection with this transaction.

Management believes that it is more likely than not that the $918 million of deferred tax assets in excess of the valuation reserve of $44 million at December 31, 2003 will be realized. This conclusion is supported in part by the significant excess of total deferred tax liabilities over net deferred tax assets. These deferred tax liabilities, primarily related to depreciation, including depreciation related to investments in joint venture partnerships, will reverse over the next 15 to 20 years. In addition, as discussed above, certain carryforwards either have no expiration dates or have long carryforward periods prior to their expiration.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The domestic and non-U.S. components of income (loss) before income taxes and a reconciliation of the income tax provision to theoretical income tax computed by applying the U.S. federal statutory tax rate are as follows:

Millions of dollars	2003			2002			2001
Loss before income taxes:
Domestic	$	(460	)	$	(277	)	$	(287	)
Non-U.S.		(21	)		63			59
Total	$	(481	)	$	(214	)	$	(228	)
Theoretical income tax at U.S. statutory rate	$	(168	)	$	(75	)	$	(79	)
Increase (reduction) resulting from:
Effects of non-U.S. operations		(5	)		11			17
Changes in estimates for prior year items		(5	)		(2	)		(23	)
Goodwill and other permanent differences		—			(3	)		3
State income taxes, net of federal		(1	)		3			1
Other, net		—			—			3
Income tax benefit	$	(179	)	$	(66	)	$	(78	)
Effective income tax rate		(37.2	)%		(31.0	)%		(34.0	)%

The change in estimate for prior year items in 2001 primarily represented certain tax effects related to the sale of assets to Bayer.

16. Commitments and Contingencies

Commitments—Lyondell is a party to various obligations to purchase products and services, principally for utilities and industrial gases. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. Also included in purchase obligations is a commitment to purchase minimum annual quantities of TDA from Rhodia through 2005 and to reimburse Rhodia for the costs of operating the TDI facility at Pont de Claix, France, through March 2016, for which TDA is the principal raw material. The Rhodia obligations, denominated in euros, include fixed and variable components. The actual future obligation will vary with fluctuations in foreign currency exchange rates, market prices of raw materials and other variable cost components such as utility costs. Approximately 25% of the annual payments through 2005 and 17% of the annual payments thereafter shown in the table below are subject to such variability.

At December 31, 2003, estimated future minimum payments under these contracts with noncancelable contract terms in excess of one year are as follows:

Millions of dollars
2004	$	381
2005		349
2006		312
2007		299
2008		298
Thereafter through 2018		1,785
Total minimum contract payments	$	3,424

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell’s total purchases under these agreements were $404 million and $305 million in 2003 and 2002, respectively. The increase in 2003 primarily reflects the effect of higher natural gas costs in 2003 and lower TDI purchases in 2002 due to maintenance activity at the Rhodia plant.

Crude Supply Agreement—Under the CSA, PDVSA Oil is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 86% of LCR’s refining capacity of 268,000 barrels per day of crude oil. Since April 1998, PDVSA Oil has, from time to time, declared itself in a force majeure situation and subsequently reduced deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. At such times, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. In certain circumstances, PDVSA Oil made payments to LCR under a different provision of the CSA in partial compensation for such reductions.

In January 2002, PDVSA Oil again declared itself in a force majeure situation and, beginning in March 2002, reduced deliveries of crude oil to LCR. Although deliveries increased to contract levels of 230,000 barrels per day during the third quarter 2002, PDVSA Oil did not revoke its January 2002 force majeure declaration during 2002. A national strike in Venezuela began in early December 2002 and disrupted deliveries of crude oil to LCR under the CSA. PDVSA Oil again declared a force majeure and reduced deliveries of crude oil to LCR. In March 2003, PDVSA Oil notified LCR that the force majeure had been lifted with respect to CSA crude oil.

LCR has consistently contested the validity of the reductions in deliveries by PDVSA Oil and Petróleos de Venezuela, S.A. (“PDVSA”) under the CSA. The parties have different interpretations of the provisions of the contracts concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, in February 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations, which LCR is continuing to litigate.

From time to time, Lyondell and PDVSA have had discussions covering both a restructuring of the CSA and a broader restructuring of the LCR partnership. Lyondell is unable to predict whether changes in either arrangement will occur. Subject to the consent of the other partner and rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances.

Depending on then-current market conditions, any breach or termination of the CSA, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. There can be no assurance that alternative crude oil supplies with similar margins would be available for purchase by LCR.

Indemnification Arrangements Relating to Equistar—Lyondell, Millennium and Occidental have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of December 31, 2003, Equistar had incurred approximately $7 million with respect to the indemnification basket for the business contributed by Lyondell. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar. See Note 5.

Environmental Remediation—As of December 31, 2003, Lyondell’s environmental liability for future remediation costs at current and former plant sites and a limited number of Superfund sites totaled $16 million. Substantially all amounts accrued are expected to be incurred over the next ten years. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liabilities recorded for environmental

28

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters.

Clean Air Act—The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). Emission reduction controls for nitrogen oxides (“NOx”) must be installed at LCR’s refinery and each of Lyondell’s two facilities and Equistar’s six facilities in the Houston/Galveston region during the next several years. Revised rules adopted by the regulatory agencies changed the required NOx reduction levels from 90% to 80%. Under the revised 80% standard, Lyondell estimates that the incremental capital expenditures would range between $250 million and $300 million for Lyondell, Equistar and LCR, collectively.

The following table summarizes the range of projected capital expenditures for Lyondell and its joint ventures to comply with the 80% NOx emission reduction requirements:

Millions of dollars	Range of Estimates
NOx capital expenditures – 100% basis:
Lyondell	$	35	-	45
Equistar		165	-	200
LCR		50	-	55
Total NOx capital expenditures	$	250	-	300
NOx capital expenditures – Lyondell proportionate share:
Lyondell – 100%	$	35	-	45
Equistar – 70.5%		115	-	140
LCR – 58.75%		30	-	35
Total Lyondell proportionate share NOx capital expenditures	$	180	-	220

Of these amounts, Lyondell’s proportionate share of spending through December 31, 2003 totaled $64 million. However, the above estimate could be affected by increased costs for stricter proposed controls over HRVOCs. Lyondell, Equistar and LCR are still assessing the impact of the proposed HRVOC revisions and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals.

The Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. states have banned the use of MTBE, while other U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or also ban the use of MTBE. During 2003, the U.S. House of Representatives and the U.S. Senate produced an energy bill that would have phased out the use of MTBE over 10 years, but also provided limited liability protection for MTBE. The House of Representatives passed the bill as reported out of conference, but the Senate has not. A new energy bill is under consideration in the Senate in 2004 that would phase out use of MTBE, but would not provide liability protection. The final form and timing of the reconciliation of these competing versions of the energy bill in the U.S. Congress is uncertain.

At the state level, a number of states have legislated MTBE bans. Of these, several are mid-West states that use ethanol as the oxygenate of choice. Bans in these states should not impact MTBE demand. However, Connecticut, California and New York have bans of MTBE in place effective January 1, 2004. These bans started to negatively affect MTBE demand during late 2003. In addition, in 2003 several major oil companies substantially reduced or discontinued the use of MTBE in gasoline produced for California markets, negatively affecting 2003 demand.

29

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell estimates that, in 2003, California, Connecticut and New York combined represented approximately one-fourth of U.S. MTBE industry demand.

At this time, Lyondell cannot predict the full impact that these potential U.S. federal and state governmental initiatives and state bans will have on MTBE margins or volumes longer term. Lyondell’s North American MTBE sales represented approximately 17% of its total 2003 revenues. Lyondell intends to continue marketing MTBE in the U.S. In the short term, in response to market conditions, Lyondell is capable of adjusting, within design limits, the relative ratios of PO and TBA produced at its PO/TBA plants. It can also shift more of its PO production to PO/SM plants from PO/TBA plants, as necessary. This flexibility has increased with the fourth quarter 2003 startup of the Maasvlakte PO/SM plant. However, should it become necessary or desirable to significantly reduce MTBE production, Lyondell would need to make capital expenditures to add the flexibility to produce alternative gasoline blending components, such as iso-octane, iso-octene or ethyl tertiary butyl ether (“ETBE”), at its U.S.-based MTBE plant. Under the more expensive iso-octane alternative, the current estimated costs for converting Lyondell’s U.S.-based MTBE plant to iso-octane production range from $65 million to $75 million. Alternatively, Lyondell’s U.S.-based MTBE plant could be converted to ETBE production with minimal capital expenditure. Lyondell is pursuing ETBE viability through legislative efforts. One key hurdle is equal access to the federal subsidy provided for ethanol blended into gasoline for the ethanol component of ETBE. Lyondell has not made any capital commitments regarding any of these alternatives at this time, and any ultimate decision will depend upon further regulatory and market developments. The profit contribution related to alternative gasoline blending components is likely to be lower than that historically realized on MTBE.

The Clean Air Act also specified certain emissions standards for vehicles and, in 1998, the EPA concluded that additional controls on gasoline and diesel fuel were necessary. New standards for gasoline were finalized in 1999 and will require refiners to produce a low sulfur gasoline by 2004, with final compliance by 2006. A new “on-road” diesel standard was adopted in January 2001 and will require refiners of on-road diesel fuel to produce 80% as ultra low sulfur diesel (“ULSD”) by June 2006 and 100% by the end of 2009, with less stringent standards for “off road” diesel fuel. To date, the off-road diesel fuel standards have not been finalized. These gasoline and diesel fuel standards will result in increased capital investment for LCR.

In 2003, LCR developed alternative approaches to complying with the low sulfur gasoline standard and the new diesel fuel standard that will lead to an approximate $300 million reduction in overall estimated capital expenditures for these projects. As a result, LCR recognized impairment of value of $25 million of project costs incurred to date. The revised estimated spending for these projects, excluding the $25 million charge, totaled between $165 million to $205 million. LCR significantly reduced the estimated costs for implementing the new diesel standards as a result of its ability to retrofit current production units. The revised estimated cost for the new diesel standards also reflects LCR’s implementation strategy for producing ULSD and “off road” diesel. LCR has spent approximately $23 million, excluding the $25 million charge, as of December 31, 2003 for both the gasoline and diesel fuel standards projects. Lyondell’s 58.75% share of these incremental capital expenditures for these projects is not expected to exceed $120 million. In addition, these standards could result in higher operating costs for LCR. Equistar’s business may also be impacted if these standards increase the cost for processing fuel components.

General—Lyondell is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material effect on the financial position, liquidity or results of operations of Lyondell.

In the opinion of management, any liability arising from the matters discussed in this note is not expected to have a material adverse effect on the financial position or liquidity of Lyondell. However, the adverse resolution in any reporting period of one or more of these matters discussed in this note could have a material impact on Lyondell’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of others, or by any insurance coverage that may be available.

30

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Stockholders’ Equity

Preferred Stock—Lyondell has authorized 80 million shares of $.01 par value preferred stock. As of December 31, 2003, none was outstanding.

Common Stock—In October 2003, Lyondell issued 13.8 million shares of common stock, including 2.7 million shares purchased by Occidental Chemical Holding Corporation, a subsidiary of Occidental, receiving net proceeds of approximately $171 million. In July 2002, Lyondell issued 8.28 million shares of common stock, receiving net proceeds of $110 million. As a result of debt amendments in 2002 (see Note 11), certain covenants restricting dividends were revised to allow an annual cash dividend of up to $0.90 per share on all common shares outstanding and any additional common shares that may be issued from time to time in the future.

Series B Common Stock, Warrants and Right—On August 22, 2002, Lyondell completed certain transactions with Occidental Chemical Holding Corporation. As a result of these transactions, Occidental Chemical Holding Corporation received an equity interest in Lyondell, including:

• 34 million shares of newly issued Lyondell Series B common stock. These shares have the same rights as Lyondell’s original common stock with the exception of the dividend. The Series B common stock pays a dividend at the same rate as the original common stock but, at Lyondell’s option, the dividend may be paid in additional shares of Series B common stock or in cash. These new Series B shares also include provisions for conversion to original common stock three years after issuance or earlier in certain circumstances;

• five-year warrants to acquire five million shares of Lyondell original common stock at $25 per share; and

• a right to receive contingent payments equivalent in value to 7.38% of Equistar’s cash distributions related to 2002 and 2003.

There were no distributions by Equistar in 2003 or 2002, and the right to a contingent payment expired with no payments made thereunder.

The $439 million recognized fair value of the 34 million shares of Series B common stock issued was determined based on an average of the high and low per-share stock prices for original common stock for 10 consecutive business days, beginning 4 business days prior to and ending 5 business days after August 8, 2002, the first date that the number of shares of Series B common stock to be issued became fixed without subsequent revision. The warrants were valued at $1.60 per share, based upon a value estimated using the Black-Scholes option pricing model. The right to receive contingent payments was valued at $3 million, based on the estimated amount and likelihood of payment in light of Lyondell’s expectations for Equistar’s business results for 2002 and 2003. The total value of the Series B common stock, the warrants and the right as well as $2 million of transaction expenses was $452 million.

Lyondell elected to pay the dividends payable to Occidental Chemical Holding Corporation in 2003 and 2002 in additional shares of Series B common stock. As a result of these transactions, Occidental Chemical Holding Corporation owns a 22% equity interest in Lyondell.

Accumulated Other Comprehensive Loss—The components of accumulated other comprehensive loss were as follows at December 31:

Millions of dollars	2003			2002
Foreign currency translation	$	80		$	(111	)
Minimum pension liability		(136	)		(160	)
Other		2			—
Total accumulated other comprehensive loss	$	(54	)	$	(271	)

Treasury Stock—From time to time Lyondell purchases its shares in the open market to issue under its employee compensation and benefits plans, including stock option and restricted stock plans.

31

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Rights to Purchase Common Stock—On December 8, 1995, the Board of Directors of Lyondell declared a dividend of one right (“Right”) for each outstanding share of Lyondell’s common stock to stockholders of record on December 20, 1995. The Rights become exercisable upon the earlier of: (i) ten days following a public announcement by another entity that it has acquired beneficial ownership of 15% or more of the outstanding shares of common stock; or (ii) ten business days following the commencement of a tender offer or exchange offer to acquire beneficial ownership of 15% or more of the outstanding shares of common stock, except under certain circumstances. The Rights expire at the close of business on December 8, 2005 unless earlier redeemed at a price of $.0005 per Right or exchanged by Lyondell as described in the Rights Agreement dated as of December 8, 1995.

In connection with the sale of securities to Occidental Chemical Holding Corporation described above under “Series B Common Stock, Warrants and Right”, and in connection with Lyondell’s October 2003 common stock offering, Lyondell’s Board of Director’s adopted resolutions exempting Occidental from certain definitions used in the agreement pertaining to these Rights. These resolutions authorize Occidental to acquire, without triggering the exercisability of the Rights, beneficial ownership of any securities contemplated by the transaction documents relating to the sale of securities described above under “Series B Common Stock, Warrants and Right” and a specified amount of common stock in the October 2003 common stock offering, as long as their aggregate direct and indirect beneficial ownership does not exceed 40% of Lyondell’s issued and outstanding common stock.

1999 Incentive Plan—The 1999 Long-Term Incentive Plan (“1999 LTIP”) provides for the grant of awards to employees of Lyondell and its subsidiaries. Awards to employees may be in the form of (i) stock options, (ii) stock appreciation rights, payable in cash or common stock, (iii) restricted grants of common stock or units denominated in common stock, (iv) performance grants denominated in common stock or units denominated in common stock that are subject to the attainment of one or more goals, (v) grants of rights to receive the value of a specified number of shares of common stock (phantom stock), and (vi) a cash payment. Awards under the 1999 LTIP are limited to the lesser of 14 million shares or 12% of the number of shares of common stock outstanding at the time of granting of the award. During 2003, 2002 and 2001, Lyondell granted stock option awards for 2,562,038 shares, 3,232,636 shares and 3,143,231 shares, respectively, under this plan.

Restricted Stock Plan—Under the 1995 Restricted Stock Plan, one million shares of common stock are authorized for grants and awards to officers and other key management employees. Lyondell grants fixed awards of common stock that are forfeitable and subject to restrictions on transfer. Vesting is contingent on the participant’s continuing employment with Lyondell for a period specified in the award. During 2003, 2002 and 2001, Lyondell granted and issued restricted stock of 185,108 shares, 2,000 shares and 2,587 shares, respectively, to officers and employees, using treasury stock for this purpose. The shares vest on various dates through July 2008, depending upon the terms of the individual grants. Recipients are entitled to receive dividends on the restricted shares.

Stock Options—The following table summarizes activity, in thousands of shares and the weighted average exercise price per share, relating to stock options under the 1999 LTIP. As of December 31, 2003, options covering 11,335,908 shares were outstanding at prices ranging from $11.25 to $19.69 per share.

	2003				2002				2001
	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year	9,624		$	15.04	6,636		$	15.59	3,666		$	14.98
Granted	2,562			12.86	3,233			13.91	3,143			16.25
Exercised	(533	)		13.11	(102	)		13.18	(50	)		12.91
Cancelled	(317	)		16.23	(143	)		16.42	(123	)		15.06
Outstanding at end of year	11,336			14.60	9,624			15.04	6,636			15.59
Exercisable at end of year	8,615			14.81	6,667			15.53	1,905			15.74

32

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock options vest over a three-year period, with one-third of the shares becoming exercisable on each of the first, second and third anniversaries of the grant date and generally expire 10 years from the grant date.

The following table summarizes share data in thousands of shares and the weighted average exercise prices for options outstanding and options exercisable at December 31, 2003, and the weighted average remaining life of options outstanding:

	Options Outstanding				Options Exercisable
Range of Exercise Prices per Share	Shares	Exercise Price		Remaining Life	Shares	Exercise Price
$11.25 to $16.88	9,950	$	14.11	8	7,310	$	14.21
$16.89 to $19.69	1,386		18.10	6	1,305		18.16
	11,336				8,615

18. Per Share Data

Basic loss per share for the periods presented is computed based upon the weighted average number of shares of original common stock and Series B common stock outstanding during the periods. Diluted earnings per share include the effect of stock options issued and outstanding warrants. These stock options and warrants were antidilutive for all periods presented. Loss per share data and dividends declared per share of common stock were as follows:

	2003			2002			2001
Basic and diluted weighted average shares, in thousands		164,288			133,943			117,563
Basic and diluted loss per share	$	(1.84	)	$	(1.10	)	$	(1.28	)
Dividends declared per share of common stock	$	0.90		$	0.90		$	0.90

See Note 17 for discussion of common stock and warrants issued during 2003 and 2002.

19. Supplemental Cash Flow Information

Supplemental cash flow information is summarized as follows for the years ended December 31:

Millions of dollars	2003		2002		2001
Interest paid, net of interest capitalized	$	391	$	347	$	372
Net income taxes received	$	34	$	103	$	12

As described in Notes 5 and 17, during August 2002, Lyondell issued certain equity securities and a right to Occidental, and received Occidental’s 29.5% interest in Equistar. The transactions included concurrent payments between the parties of agreed amounts of approximately $440 million. The agreed amounts exchanged are included in cash used for investing activities and cash from financing activities. The securities issued, and the additional investment in Equistar, have been recorded at the estimated fair value of the consideration issued totaling $452 million plus the recognition of $352 million of deferred tax liabilities, for a total additional investment in Equistar of $804 million.

33

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. Segment and Related Information

Lyondell operates in four reportable segments:

• Intermediate chemicals and derivatives (“IC&D”), which include PO, PG, PGE, BDO, TDI, SM, and TBA and its derivative, MTBE;

• Petrochemicals, which include ethylene, propylene, butadiene, oxygenated products and aromatics;

• Polymers, which primarily include polyethylene and polypropylene; and

• Refining of crude oil.

34

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The accounting policies of the segments are the same as those described in “Summary of Significant Accounting Policies” (see Note 2). No customer accounted for 10% or more of consolidated sales during any year in the three- year period ended December 31, 2003. However, under the terms of LCR’s Products Agreement (see Note 6), CITGO purchases substantially all of the refined products of the refining segment. Lyondell’s entire $1.1 billion balance of goodwill is allocated to the IC&D segment.

Summarized financial information concerning reportable segments is shown in the following table:

Millions of dollars	IC&D			Petrochemicals		Polymers			Refining		Other			Total
2003
Sales and other operating revenues	$	3,801		$	—	$	—		$	—	$	—		$	3,801
Operating loss		(1	)		—		—			—		—			(1	)
Income (loss) from equity investments		(19	)		87		(55	)		144		(260	)		(103	)
Total assets		6,436			650		246			232		69			7,633
Capital expenditures		268			—		—			—		—			268
Depreciation and amortization expense		250			—		—			—		—			250
2002
Sales and other operating revenues	$	3,262		$	—	$	—		$	—	$	—		$	3,262
Operating income		174			—		—			—		—			174
Income (loss) from equity investments		1			65		(37	)		135		(150	)		14
Total assets		5,967			799		337			297		48			7,448
Capital expenditures		22			—		—			—		—			22
Depreciation and amortization expense		244			—		—			—		—			244
2001
Sales and other operating revenues	$	3,193		$	—	$	—		$	—	$	—		$	3,193
Operating income		112			—		—			—		—			112
Income (loss) from equity investments		—			113		(77	)		129		(125	)		40
Total assets		5,887			343		136			258		79			6,703
Capital expenditures		68			—		—			—		—			68
Depreciation and amortization expense		254			—		—			—		—			254

The following table presents the details of “Income (loss) from equity investments” as presented above in the “Other” column for the years ended December 31:

Millions of dollars	2003			2002			2001
Equistar items not allocated to segments - principally general and administrative expenses and interest expense, net	$	(260	)	$	(145	)	$	(113	)
Other		—			(5	)		(12	)
Loss from equity investments	$	(260	)	$	(150	)	$	(125	)

35

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Through April 30, 2002, the methanol operations of LMC were included in the “Other” column. Effective May 1, 2002, LMC was wholly owned by Lyondell and the methanol results were included in the IC&D segment from that date. The effects of consolidating the LMC operations, which previously had been accounted for using the equity method, and of including the methanol operations in the IC&D segment were not material.

The following table presents the details of “Total assets” as presented above in the “Other” column for the years ended December 31:

Millions of dollars	2003		2002		2001
Equistar items not allocated to segments - Other assets	$	69	$	48	$	43
Equity investment in LMC		—		—		36
Total Other	$	69	$	48	$	79

The following “Revenues” by country data are based upon the delivery location of the product. The “Long-lived assets” by country data are based upon the location of the assets.

	Revenues						Long-Lived Assets
Millions of dollars	2003		2002		2001		2003		2002		2001
United States	$	1,967	$	1,807	$	1,732	$	1,808	$	1,941	$	2,006
Non-U.S.		1,834		1,455		1,461		1,698		1,198		1,004
Total	$	3,801	$	3,262	$	3,193	$	3,506	$	3,139	$	3,010

Non-U.S. long-lived assets primarily consist of the net property, plant and equipment, including the investment in the European PO Joint Venture, located near Rotterdam, The Netherlands, and at Fos-sur-Mer, France, all of which are part of the IC&D segment.

36

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21. Unaudited Quarterly Results

	For the quarter ended
Millions of dollars, except per share data	March 31			June 30			September 30			December 31
2003
Sales and other operating revenues	$	989		$	913		$	954		$	945
Operating income (loss)		(18	)		(6	)		20			3
Income (loss) from equity investments		(83	)		1			13			(34	)
Net loss		(113	)		(68	)		(44	)		(77	)
Basic and diluted earnings loss per share (a)		(0.70	)		(0.43	)		(0.27	)		(0.44	)
2002
Sales and other operating revenues	$	674		$	843		$	855		$	890
Operating income		38			65			59			12
Income (loss) from equity investments		(21	)		32			44			(41	)
Net income (loss)		(55	)		2			(2	)		(93	)
Basic and diluted earnings income (loss) per share (a)		(0.47	)		0.02			(0.02	)		(0.58	)

(a) Earnings per common share calculations for each of the quarters are based upon the weighted average number of shares outstanding for each period (basic earning per share). The sum of the quarters may not necessarily be equal to the full year earning per share amount.

22. Supplemental Guarantor Information

ARCO Chemical Technology Inc. (“ACTI”), ARCO Chemical Technology L.P. (“ACTLP”) and Lyondell Chemical Nederland, Ltd. (“LCNL”) are guarantors, jointly and severally, (collectively “Guarantors”) of the following (see Note 11):

• Senior Secured Notes, Series A due 2007, 9.625%

• Senior Secured Notes, Series B due 2007, 9.875%

• Senior Secured Notes due 2008, 9.5%

• Senior Subordinated Notes due 2009, 10.875%

• Senior Secured Notes due 2012, 11.125%, and

• Senior Secured Notes due 2013, 10.5%.

LCNL, a Delaware corporation and a wholly owned subsidiary of Lyondell, owns a Dutch subsidiary that operates chemical production facilities near Rotterdam, The Netherlands. ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. Separate financial statements of the Guarantors are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of December 31, 2003 and 2002 and for the three years ended December 31, 2003.

37

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of and for the year ended December 31, 2003

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
BALANCE SHEET
Total current assets	$	824		$	212		$	323		$	—		$	1,359
Property, plant and equipment, net		817			879			944			—			2,640
Investments and long-term receivables		5,655			630			1,861			(5,998	)		2,148
Goodwill, net		723			130			227			—			1,080
Other assets		271			76			59			—			406
Total assets	$	8,290		$	1,927		$	3,414		$	(5,998	)	$	7,633
Current maturities of long-term debt	$	—		$	—		$	—		$	—		$	—
Other current liabilities		441			142			116			—			699
Long-term debt		4,149			—			2			—			4,151
Other liabilities		609			44			27			—			680
Deferred income taxes		517			185			90			—			792
Intercompany liabilities (assets)		1,418			145			(1,563	)		—			—
Minority interest		—			—			155			—			155
Stockholders’ equity		1,156			1,411			4,587			(5,998	)		1,156
Total liabilities and stockholders’ equity	$	8,290		$	1,927		$	3,414		$	(5,998	)	$	7,633
STATEMENT OF INCOME
Sales and other operating revenues	$	2,347		$	1,062		$	2,193		$	(1,801	)	$	3,801
Cost of sales		2,420			1,021			1,959			(1,801	)		3,599
Selling, general and administrative expenses		87			23			56			—			166
Research and development expenses		37			(1	)		1			—			37
Operating income (loss)		(197	)		19			177			—			(1	)
Interest income (expense), net		(417	)		19			6			—			(392	)
Other income (expense), net		(49	)		9			55			—			15
Income (loss) from equity investments		252			(19	)		(63	)		(273	)		(103	)
Intercompany income (expense)		229			168			64			(461	)		—
(Benefit from) provision for income taxes		(68	)		73			89			(273	)		(179	)
Net income (loss)	$	(114	)	$	123		$	150		$	(461	)	$	(302	)

38

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the year ended December 31, 2003

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
STATEMENT OF CASH FLOWS
Net income (loss)	$	(114	)	$	123		$	150		$	(461	)	$	(302	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		70			58			122			—			250
Gain on sale of equity interest		—			—			(18	)		—			(18	)
Deferred income taxes		(154	)		(20	)		2			—			(172	)
Debt prepayment charges and premiums		5			—			—			—			5
Net changes in working capital and other		40			378			(78	)		—			340
Net cash provided by (used in) operating activities		(153	)		539			178			(461	)		103
Expenditures for property, plant and equipment		(23	)		(225	)		(20	)		—			(268	)
Distributions from affiliates in excess of earnings		—			—			111			—			111
Contributions and advances to affiliates		—			(106	)		(31	)		—			(137	)
Proceeds from sale of equity interest		—			—			28			—			28
Maturity of other short-term investments		44			—			—			—			44
Net cash provided by (used in) investing activities		21			(331	)		88			—			(222	)
Issuance of long-term debt		318			—			—			—			318
Repayment of long-term debt		(103	)		—			—			—			(103	)
Issuance of common stock		171			—			—			—			171
Dividends paid		(116	)		(208	)		(253	)		461			(116	)
Other		(4	)		—			—			—			(4	)
Net cash provided by (used in) financing activities		266			(208	)		(253	)		461			266
Effect of exchange rate changes on cash		—			(1	)		6			—			5
Increase (decrease) in cash and cash equivalents	$	134		$	(1	)	$	19		$	—		$	152

39

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of and for the year ended December 31, 2002

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
BALANCE SHEET
Total current assets	$	674		$	173		$	324		$	—		$	1,171
Property, plant and equipment, net		872			581			916			—			2,369
Investments and long-term receivables		7,043			504			2,196			(7,394	)		2,349
Goodwill, net		745			145			240			—			1,130
Other assets		313			83			33			—			429
Total assets	$	9,647		$	1,486		$	3,709		$	(7,394	)	$	7,448
Current maturities of long-term debt	$	1		$	—		$	—		$	—		$	1
Other current liabilities		440			90			102			—			632
Long-term debt		3,924			—			2			—			3,926
Other liabilities		593			48			23			—			664
Deferred income taxes		637			172			72			—			881
Intercompany liabilities (assets)		2,873			(1,223	)		(1,650	)		—			—
Minority interest		—			—			165			—			165
Stockholders’ equity		1,179			2,399			4,995			(7,394	)		1,179
Total liabilities and stockholders’ equity	$	9,647		$	1,486		$	3,709		$	(7,394	)	$	7,448
STATEMENT OF INCOME
Sales and other operating revenues	$	2,216		$	807		$	1,814		$	(1,575	)	$	3,262
Cost of sales		2,259			745			1,469			(1,575	)		2,898
Selling, general and administrative expenses		95			17			48			—			160
Research and development expenses		30			—			—			—			30
Operating income (loss)		(168	)		45			297			—			174
Interest income (expense), net		(390	)		11			6			—			(373	)
Other income (expense), net		(82	)		23			30			—			(29	)
Income (loss) from equity investments		474			(2	)		35			(493	)		14
Intercompany income (expense)		860			162			103			(1,125	)		—
(Benefit from) provision for income taxes		211			73			144			(494	)		(66	)
Net income (loss)	$	483		$	166		$	327		$	(1,124	)	$	(148	)

40

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the year ended December 31, 2002

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
STATEMENT OF CASH FLOWS
Net income (loss)	$	483		$	166		$	327		$	(1,124	)	$	(148	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		112			40			92			—			244
Deferred income taxes		(49	)		10			15			—			(24	)
Net changes in working capital and other		(383	)		(14	)		614			—			217
Net cash provided by operating activities		163			202			1,048			(1,124	)		289
Expenditures for property, plant and equipment		(10	)		(4	)		(8	)		—			(22	)
Contributions and advances to affiliates		—			(46	)		(68	)		—			(114	)
Purchase of equity investment in Equistar		(440	)		—			—			—			(440	)
Purchase of short-term investments		(44	)		—			—			—			(44	)
Other		(3	)		—			—			—			(3	)
Net cash used in investing activities		(497	)		(50	)		(76	)		—			(623	)
Issuance of long-term debt		591			—			—			—			591
Repayment of long-term debt		(543	)		—			—			—			(543	)
Issuance of Series B common stock, warrants, and right		440			—			—			—			440
Issuance of common stock		110			—			—			—			110
Dividends paid		(109	)		(138	)		(986	)		1,124			(109	)
Other		(18	)		—			—			—			(18	)
Net cash provided by (used in) financing activities		471			(138	)		(986	)		1,124			471
Effect of exchange rate changes on cash		—			(7	)		10			—			3
Increase (decrease) in cash and cash equivalents	$	137		$	7		$	(4	)	$	—		$	140

41

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of and for the year ended December 31, 2001

Millions of dollars	Lyondell			Guarantors			Non- Guarantors		Eliminations			Consolidated Lyondell
STATEMENT OF INCOME
Sales and other operating revenues	$	2,178		$	786		$	1,605	$	(1,376	)	$	3,193
Cost of sales		2,237			566			1,435		(1,376	)		2,862
Selling, general and administrative expenses		86			16			55		—			157
Research and development expenses		32			—			—		—			32
Amortization of goodwill		12			11			7		—			30
Operating income (loss)		(189	)		193			108		—			112
Interest income (expense), net		(384	)		3			12		—			(369	)
Other income (expense), net		(134	)		(83	)		206		—			(11	)
Income (loss) from equity investments		616			—			60		(636	)		40
Intercompany income (expense)		267			335			128		(730	)		—
(Benefit from) provision for income taxes		60			152			174		(464	)		(78	)
Net income (loss)	$	116		$	296		$	340	$	(902	)	$	(150	)

42

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the year ended December 31, 2001

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
STATEMENT OF CASH FLOWS
Net income (loss)	$	116		$	296		$	340		$	(902	)	$	(150	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		123			47			84			—			254
Net changes in working capital and other		(642	)		119			(284	)		902			95
Net cash provided by (used in) operating activities		(403	)		462			140			—			199
Expenditures for property, plant and equipment		(17	)		(8	)		(43	)		—			(68	)
Distributions from affiliates in excess of earnings		(10	)		—			60			—			50
Contributions and advances to affiliates		61			(115	)		(119	)		—			(173	)
Other		470			—			—			(470	)		—
Net cash provided by (used in) investing activities		504			(123	)		(102	)		(470	)		(191	)
Issuance of long-term debt		385			—			—			—			385
Repayment of long-term debt		(394	)		—			—			—			(394	)
Dividends paid		(106	)		(426	)		(44	)		470			(106	)
Other		(7	)		—			—			—			(7	)
Net cash provided by (used in) financing activities		(122	)		(426	)		(44	)		470			(122	)
Effect of exchange rate changes on cash		—			67			(67	)		—			—
Decrease in cash and cash equivalents	$	(21	)	$	(20	)	$	(73	)	$	—		$	(114	)

43